Six years after serving as vice-chairman of the Egyptian exchange, Mohamed Farid (official bio) was tapped as EGX chairman in August 2017. His return to government service was preceded by a five-year stint as CEO and chairman of private-sector economic think tank Dcode, as well as an adjunct at AUC and the Arab Academy for Science, Technology and Maritime Transport. He was also a consultant to the World Bank. Since taking the helm of the EGX, Farid has seen through the introduction of new trading tools and regulations, including market making, margin trading, and changes in the criteria for inclusion in the benchmark EGX30.

In the latest edition of our “Coffee with…” series, we sat down with Farid for a chat about the EGX and the questions on everybody’s minds.

The key takeaways:

• Farid is passionate about one thing: The power of long-term incremental savings via investing in the stock market to rebuild the middle class. It is, he says, the ultimate hedge against inflation;
• At least 3-4 private sector companies are in the IPO pipeline — that’s over and above what we can expect from the state’s privatization program;
• The private sector is not being crowded out of the economy: Private-sector participation in GDP has gone from 62% before 25 January 2011 to 69.5% in FY2017-18;
• The upcoming EGX30 Total Return index will show the power of dividends — look for it to launch in 1Q2019;
• The opportunity to attract new investors from Asia to the EGX is substantial;
• Retail investors are aging out of the market — EGX is working on outreach and education initiatives to attract a new generation;
• He’s not concerned about competition from the London Stock Exchange for high-profile Egyptian listings;
• There is a movement afoot to create a real market for corporate debt;
• Look for a push sometime late this year or early next year to breathe life into the Nilex — including, possibly, listed venture capital and small private equity firms.

Enterprise: Could you give our readers, who aren’t familiar with the subject, what exactly is the stock exchange?

Mohamed Farid: The stock exchange is a platform that anyone can use to invest a sum of money for a return. Be it for significant investments or incremental saving in capital markets. It’s a platform where shares — a piece of paper that represents ownership in a company — are traded just like wheat, rice, sugar. Whether they are in food or in real estate, the companies on the exchange are ones that you and I deal with on a daily basis. These daily interactions between the consumers and companies impact the stock price, which in turn, impacts the company’s ability to draw investments, which it will then spend on making the product for the consumer. This interlocking dependence between the consumer and the company is why the stock exchange matters to everyone.

E: Incremental savings, you say? Could you elaborate?

MF: One of the biggest missed opportunities for people, is the long term incremental savings benefits that come with investing in the stock market. It’s a problem of perception borne out of a misconception. The problem for the average person when it comes to capital markets — and the stock market specifically — is deciding on which stock to buy, when to buy it and when to get out. The concerns over swings and volatility become minute details when looked at from the long term perspective. We’re talking over a period of about 20 or 25 years, where it is perfectly possible to save around EGP 1000 per month on a monthly/annual basis. The longevity of the incremental investment should yield investors not to worry about what happens in a single trading day. People think 20 years is a long time, but numbers do add up.

A point to remember — it’s about investing in indices: What enables investors to overcome the choice and timing of their incremental investments or savings decision is investing in index trackers or instruments that are not prone to the movement of one single stock. This would reduce the impact of volatility in the prices of one stock in particular by investing in the constituents of an index.

E: What’s the missed opportunity here?

MF: Just look at how the EGX has grown from a market cap of EGP 400 bn from before the EGP float in 2016 to EGP 1 tn at its highest level in April 2018. We’re talking about more than a 100% increase in the value of the companies on the exchange. Few have reaped the benefits of this growth due to the lack of wider participation in the stock market by the middle class.

E: How are opening and closing prices calculated on the stock exchange?

MF: Opening prices are the previous day’s closing prices. Closing prices are determined by what is called the volume weighted average price. You basically add up all the money spent on every trade on a stock and then dividing by the total number of shares traded.

E: What’s the role of price discovery in the morning?

MF: The role of the price discovery mechanism is to factor into the opening price the impact of a major news or disclosure that came up after the previous day’s closing price and might affect the stock price. The pre-opening session — or the discovery session — runs from 9.30 am to 10am (when trade starts on the EGX). During this session, if the news is perceived as impacting the price, you will find investors placing orders on the trading system. The object of the session is to get a theoretical matching price that is different from the closing price and is considered the opening price for the stock.

E: Let’s talk about volatility. It’s been a crazy year on the volatility front, first in EM and then the worst December since the financial crisis.

MF: The risk premium increased, whether it is for an emerging market or a developed market. With Brexit and the US-China trade war, the risk premiums on international markets will be present for some time. This rising risk premium will affect growth in developed markets and impact the decisions of the US Federal Reserve, which is why it has been raising interest rates at a slower pace than what was originally envisaged. Especially when you look at yield curves now internationally, they’re a bit flat. This should unfold in the first three quarters of 2019, to see dynamics of growth and inflation.

What makes Egypt stand out is the economic reform story and the government’s significant desire to expand the role of capital markets in the economy. The depth of fiscal and monetary reforms accompanied by unprecedented infrastructure investments increases what is called potential economic growth rate and developing social safety nets and programs as the assumed trickle-down-effect proved not to work 100%. The government has also demonstrated that it is agile enough to respond to the volatility in international markets. Case in point, the delay of the state privatization program. Postponing the program is not a cancelation, but a clear and temporary adaptive measure.

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