Since becoming chairman of the Cairo & Alexandria Stock Exchanges (Case) three years ago, Maged Shawky has presided over an impressive period of growth in the region’s oldest market. But his priority has been to modernise the 125-year-old market, to prepare it for possible privatisation, and to protect it from any future downturn in the value of shares listed on the exchange.
An impression of how a downturn might look came in May, when the Case 30 index of Egypt’s largest quoted companies fell by 15 per cent in just two weeks, from a high of 11,936 points to 10,169 points.
1992: Senior assistant on securities markets to the Minister of Economy & Foreign Trade
2002: Director representing the Capital Markets Authority at Case
2004: Deputy chairman of Case
2005: Chairman of Case
Also, chairman of the African Securities Exchanges Association and vice-chairman of the Federation of Euro-Asian Stock Exchanges
A flat-screen TV on Shawky’s office wall shows a list of Case 30 companies almost of all of which are in red, indicating decreases in their value. But Shawky appears more preoccupied with the pair of TV screens directly in front of his desk. Throughout the interview, his gaze switches to the two screens, alternating between the images of a rock concert and a street fight in Lebanon.
Asked how he is handling Egypt’s four-year bull market, he gestures to the list of red names. “Today, it is about the fall in the market,” he says.
As it turns out, the 15 per cent drop in the index is only temporary. The Case 30 recovers to 11,057 points by the end of trading on 29 May, although it again falls below the 11,000 mark in early June. The recent sell-offs are rare examples of the few reverses in the past four years.
Since July 2004, when Ahmed Nazif was appointed prime minister, the Case 30 has increased in value by more than 600 per cent. Shawky owes his job at Case to the rise of Nazif’s government of economic liberals. He reports to Investment Minister Mahmoud Mohieldin, who is ultimately responsible for the exchange, which is wholly owned by the government.
While the performance of the index continues to impress, Shawky acknowledges that it cannot last forever and the bull market will become a bear market at some stage.
“The exchange will not continue to perform so well forever,” he says. “There is definitely a point in time when we will have a correction, but I do not know when it will be.”
The first stage in preparing for a bear market is the exchange’s three-year campaign to delist companies that fail to abide by the rules on financial disclosure.
Shawky has already cut the number of companies on the exchange by two-thirds, removing about 800 companies for failing to disclose financial information every quarter or for restricting active trading in their shares. He delisted 27 companies in early May and up to 100 other companies will have their shares suspended by the end of 2008, when the delisting campaign reaches its conclusion.After that, all the remaining companies on the Case should be professionally managed and financially transparent.
“We have about 350-odd listed companies. We have already delisted about 800,” says Shawky. “That is a lot in three years. We are moving towards more quality, where the only companies left in the market are actively traded on a daily basis.”
The companies in the Case 30 index account for most of the £E850bn ($159bn) worth of capital listed on the exchange. They are also the most rule-abiding securities on the exchange.
Shawky’s delisting campaign is aimed at smaller companies that either cannot or will not fit in with the professionally managed, multinational businesses that the exchange clearly prefers.
“We are doing a monthly review,” he says. “We decide who is going to be delisted. When they started to see that the stock exchange was being serious about enforcing its rules, a lot of companies tightened up their compliance.”
Almost all the worst offenders have already left the index. “There is not a lot remaining,” says Shawky.
The large number of small rule-breaking companies that have left the index are being replaced with a smaller number of sizeable, professionally managed businesses that have decided to list on the exchange.
“What is going out is being replaced by initial public offerings [IPOs] of quality companies,” he says. “There are not the same numbers, but in terms of value they are worth much more than what we delisted.”
Two sizeable companies made their debuts on the stock exchange in May. Maridive, an offshore oil exploration company that does a lot of work for the Kuwait Oil Company, decided it would benefit from a fresh injection of capital if it was listed. Managers at real estate company Palm Hills Development came to the same conclusion. At the end of trading on 29 May, they were worth £E4.2bn and £E8.3bn respectively.
Case is not expecting any other significant new listings until after the lull in activity during the summer and Ramadan
Some of the delisted businesses have taken Case to court. They argue that the exchange broke the law by removing their status as listed companies. Egypt’s notoriously slow legal system means a judgement is unlikely to be made for years. Nevertheless, Shawky is convinced the exchange will win. “It is very clear in the law,” he says. “They have no legal basis going to court.”
The other major task for the exchange is to overhaul its infrastructure so that it can cope with increasing numbers of transactions and, eventually, different types of financial instruments. The exchange currently uses a trading platform that it bought in 2000 when it assumed the maximum number of daily transactions would be 15,000 for the foreseeable future. However, that figure has now been easily surpassed and the average number of trades a day in 2008 is about 25,000.
The worst nightmare for any stock exchange boss is the collapse of the trading platform and the number of transactions currently taking place on the Case is far greater than the upper limit of its existing system. The exchange’s own software developers have adapted the existing trading platform so that it can cope with the extra deals, but stock exchanges usually avoid such large-scale upgrades as it can increase the cost of maintaining the systems and increase the risk of a failure. Clearly, moving to a new platform is vital for Shawky.
From the middle of 2009, Case also wants to offer trading in derivatives – financial instruments that give investors exposure to an asset without making them buy that asset – which will further boost activity on the stock market. Its existing platform can only handle standard equity transactions.
“We already have a new trading platform that we will migrate onto in July,” says Shawky. “By 2009, you will find the derivative markets in place on the new trading platform.”
Case has chosen a platform from OMX, the Swedish stock market operator that was acquired by US exchange Nasdaq this year. The OMX platform is already used by the Singapore Exchange and the Swiss Exchange. In addition, the Nasdaq OMX group owns a minority stake in the Dubai International Financial Exchange.
Shawky is going to unusual lengths to prevent any problems when the market switches to the new platform. Case will run its eight-year-old system alongside the OMX platform for a full month, a much longer period than most exchanges that migrate to a different platform, says Bob McDowall, a senior analyst at US-based IT consultant Tower Group. “A full parallel run of two systems is a huge consumption of resources,” he says. “I do not think an organisation can do more than that.”
Shawky says this will minimise the risk of an embarrassing blunder by either the exchange or any of the banks that are authorised to trade on it. “We are parallel-running the whole system for one month even though it is normally only a week or two,” says Shawky. “The new one can handle 1 million transactions in bonds, derivatives and equities.”
Shawky claims he is not concerned about the migration. “We are not worried about it,” he says. “We are also upgrading our entire network to fibre-optic cables [to cope with the new system]. We are spending like hell on communications networks and fibre optics because market forces are pushing us to introduce a better system.”
Most of Case’s budget is spent on maintaining and upgrading its infrastructure. Shawky’s plans to use infrastructure spending to introduce different types of financial instruments will result in the exchange returning to its origins. Case began in Alexandria in 1883 as a trading house for futures contracts in cotton, wheat, barley and onions.
The OMX platform will allow Case to trade futures again, although this time investors are likely to be more interested in trading equities rather than commodities futures.
Shawky also wants to return the exchange to its past in another way: by convincing the government to privatise it. “There is a plan for this,” he says. “We proposed privatisation, but I think it will take some time. We have already done most of the things that need to be done for a state-owned enterprise to privatise. We are managing our balance sheet in the same way as a private company.”
Shawky says the willingness of other regional governments to sell stakes in their stock markets, including the flotation of shares in the Dubai Financial Market and the proposed sale of the Abu Dhabi Stock Exchange, has helped make the case for the eventual privatisation of Case. “The success story of Dubai will ease our prospects a bit,” he says.
The partial privatisation of Telecom Egypt has also shown the government that it can sell stakes in its flagship state-owned enterprises. The sell-off aroused significant political opposition at the time, but that has since abated.
Unfortunately for Shawky, the government sees the privatisation of Case as a radical step. Even Investment Minister Mahmoud Mohieldin has yet to be convinced. “He is a bit cautious about it because of public opinion and how we sell the message to ordinary Egyptians,” says Shawky. “The exchange is an icon and a national treasure.”
Everything is changing at Case. Within two years, the exchange will leave its location of more than 80 years in the middle of downtown Cairo, to join other government bodies in Smart Village, the technology campus on the Cairo-Alexandria Desert road. Tidy and spacious, Smart Village is the opposite of downtown Cairo. The move to new offices will be symbolic: Case is becoming a different institution from the one that Shawky joined three years ago.