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Tuesday, 19 January 2021

EGX30 gets a boost with new criteria

New criteria for inclusion in the country’s most important stock index are rolling out next month. The changes aim to make the EGX30 more attractive to foreign investors by giving more weight to stocks with large market capitalizations that are more attractive to institutional investors. The changes would give less prominence to heavily-traded small cap “momentum” plays favoured by retail investors. You can check our EGX boss Mohamed Farid’s statement here.

How it works today: The EGX30 basically reflects the index’s 30 most-traded companies, with a few caveats: Constituents, as they’re known, must also have a minimum 15% freefloat, be traded on at least 65% of trading days during the rebalancing period, and can’t have 30% or more shares in cross-holdings. You can read up on the current methodology here (pdf).

How it’s going to work starting in February: To qualify for inclusion, a company will need to have a freefloat market cap (which is simply the number of shares in freefloat multiplied by the share price at any given moment) equal to or above the median average of the 60 most actively-traded companies. The idea is to ensure that the EGX30 simultaneously reflects the largest and most actively traded companies on the bourse. Requirements on freefloat and active trading days remain in effect under the new system.

Companies ranked #1-27 are included automatically, while the EGX has some flexibility to choose the last three companies from among those ranked #28-33. The idea is that the automatic inclusion of the top 27 companies will see fewer changes to the index every time it is reviewed.

The EGX30 is reviewed (or “rebalanced”) every six months, at the beginning of February and of August each year. This means that the changes will be felt next month when companies are kicked off and added to the index.

Analysts cheered the new new system: “This effectively creates an index that is better representative of the large, successful Egyptian corporations with fundamentally sound stories, rather than just highly-traded names that might be impacted by retail activity,” Pharos Head of Research Radwa El Swaify told us.

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