In the wake of the collapse of stock prices on the Egyptian Exchange (EGX), asset management experts say investors will be hard-pressed to resist the temptations of high return on savings certificates and deposits
The volume of trading dropped to a rate of EGP 350m to EGP 400m per session. This decline coincided with the steady decrease of the market capitalisation, which fell from EGP 430bn to EGP 391bn in January 2016 alone, compared to the EGP 70bn lost last year.
The EGX-30 index lost 14.46% over the month of January. Deposits, bonds and savings certificates are seen as competitive investment vehicles for the exchange market, where each investment tool is designed to attract investors based on the proceeds and degree of risk.
Essam Khalifa, Managing Director of National Fund Management Co., said investors are tending towards investing in savings certificates and deposits: proceeds from the sale of three-year savings certificates, with a 12.5% return, rose to 100bn until 9 January, according to press statements by banking leaders in Banque Misr, National Bank of Egypt (NBE) and Banque du Caire.
Hussein Rifai, executive board member of the NBE, said proceeds from the sale of savings certificates amounted to EGP 63.5bln, 20% of which comes from outside the bank.
Meanwhile, Mohamed El-Etreby, chairman of Banque Misr, said proceeds from the certificates amounted to EGP 29.4bln, while Mounir El-Zahid, chairman and CEO of Banque du Caire, said the bank recorded sales of certificates at EGP 7bn.
The launch of the ‘three-year platinum savings certificate’ coincided with EGX’s decline since the fourth quarter of 2015 until now. This has resulted in a significant increase of savings, whereby the certificates have proven to be a refuge from the fallout of the exchange market crash over the past three months.
Khalifa commented on the Central Bank of Egypt’s (CBE) recent decision to limit investment in cash funds and fixed income funds to 2.5%, rather than 5% of each bank’s deposit, saying this led to a lack of new subscriptions to the funds, pushing investors to search for other investment methods in low-risk portfolios.
He added that the banks will have to continue to implement this policy until the volume of the funds amounts to 2.5% of total deposits, in accordance with the CBE’s decision, meaning that investors will choose safe instruments, such as deposits.
Nevertheless, Khalifa said that EGX is still the best choice for investors to compensate their losses, as investing in deposits or treasury bills will not make enough revenues to cover losses.
The cash funds invest approximately 70% of their money in deposits and short-term treasury bills that do not exceed 90 days, in order to collect their returns quickly. They invest the remaining 30% in stocks. The fixed income funds focus their investments in the treasury bills and bonds, and medium-term deposits.
CEO of Al-Shorouk Brokerage Hany Helmy said the bank deposits, in particular savings certificates, have become a safe haven for small investors. Some of these investors resorted to suspending their financial portfolios, and invested their money in savings certificates to offset the losses they incurred over more than a year.
He added that EGX has faced numerous obstacles since the beginning of the last year, notably the imposing of taxes on EGX profits and the distributions of companies’ profits, as well as the fallout from the Russian plane crash last November. Additionally, the EGX faced the consequences of the Chinese economy’s slowdown and the collapse of oil prices.
Helmy noted that all these factors led to the loss of 70% of small investors’ portfolios. Under these circumstances, the investment instruments in banks stood as alternatives to compensate part of these losses, rather than continuing in the EGX due to lack of indicators pointing to its improvement in the short-term.
A research paper recently issued by Pharos Investment Bank concluded that the saving certificates will lead to decreasing liquidity in the market. Pharos advised investors to focus on long-term investments in the stock market.
Mostafa Assal, Director of Bondlink, believes that investing in deposits or bonds is the best choice for investors. He added that on the local level, the top choice is the three-year savings certificates that provide a 12.5% return.
Assal said the investors’ main goal is to maintain the value of their investments, which requires investing their money in stable financial instruments that are removed from the fluctuations in exchange rates.
The most prominent example of these safe instruments is investing in bank deposits in Swiss francs and US dollars, because of their stability, or investing in US and German bonds, given the stability of both economies and their high credit rating.