In an interview with Daily News Egypt, leaders of Mubasher brokerage, asset management, and financial consulting firms revealed the strategy they have for the coming period.
The interview was conducted with board member of Mubasher Advisory for Securities Ehab Rashad, managing director of Mubasher Asset Management Mohamed Kotb, and global head of research at Mubasher Financial Services Amr Elalfy.
They said that Mubasher aims to acquire a new financial firm to stimulate their expansion plan, as well as present new ideas to Egyptian financial institutions after the company adds the licence manager activity.
Moreover, they added that Mubasher assigned a chartered accountant to proceed with the establishment of a holding company with a capital of EGP 100m to include all three companies for direct brokerage, asset management, and consulting. The holding company would also add new activities, such as secretariat, promotion, covering, and underwriting IPOs.
Mubasher expanded a lot in the past two years in opening branches and developing new software. What is the company’s strategy for 2017?
Rashad: We strive to reach all of Egypt’s governorates. The pace of expansion is based on market conditions. We received an approval just two weeks ago to open a new branch in Mallawi in Upper Egypt. We are also in the process of getting approvals for the branch from the Egyptian Financial Supervisory Authority (EFSA) in Sohag. This would boost the number of our branches to eight in Upper and Lower Egypt.
Why open new branches when the general trend of brokerage firms is to attract clients via internet technology and modern applications?
Rashad: There is of course a new generation of investors who prefer technological applications. We do target those customers through the development of applications and software. Mubasher is about to launch a new application for its clients in the first quarter of 2017. On the other hand, old-school investors prefer dealing with brokers face to face—which we keep in mind.
Mubasher failed to acquire Al Tawfeeq Investment Holdings. Could the company rely on expansion soon through acquiring new companies?
Rashad: Yes, Mubasher aims to expand through acquiring a financial company soon, given it runs a business portfolio that could add something new to our company. The value of the transaction will, of course, rely on the company.
What are the latest developments in the establishment of Mubasher Holdings?
Rashad: We now have licences for brokerage, asset management, and consulting. We assigned a charter accountant to continue the procedures of establishment so it could acquire new existing companies. We also aim to add new activities, such as secretariat, promotion, covering, and underwriting IPOs. The new company would have a capital of EGP 100m.
To what extent do you think foreign investors will continue buying at this magnitude?
Rashad: Foreign investors are currently following a purchase trend. To which extent relies on how the exchange rate will fluctuate, especially as Egypt is going through the flotation of the Egyptian pound for the first time. The stability of the exchange rate will encourage foreign investors to inject funds. This should be signaled early next year.
What is the vision of Mubasher Advisory for Securities?
Rashad: Consulting complements Mubasher activities, especially in light of the new opportunities available for consulting. The company has experts that could provide consulting and advising, which would complement our brokerage activity in case of promoting IPOs. We are now assessing a local media company to acquire.
How did foreign investors’ vision for acquisition and merger deals change after the flotation?
Elalfy: The decision to float was a prominent stimulus for acquisitions and mergers. Mubasher has strong relations with investors in the Gulf who are looking for what is happening in Egypt now. The flotation will, of course, lower the value of most companies, especially the companies that import raw materials.
Mergers and acquisitions development is tied to fixing the problems with repatriation of profits of companies in Egypt. The liberalisation of the exchange rate helps foreign investors enter and exit the Egyptian market at any time. The coming few weeks will unveil the extent to which banks can secure governmental banks.
The Egyptian Exchange (EGX) is seeing anticipation by new foreign investors who are waiting to see the outcome of the flotation. Foreigners who are already in the market employ the liquidity they have to buy stocks, with the aim to avoid the value of their liquidity denominated in Egyptian pounds after the flotation.
Investment costs increased after the cost of funding rose on the back of the hiking interest rates on loans. Meanwhile, demand in the retail sector declined as the purchase power of citizens declined. How would all these factors impact growth?
Elalfy: The real growth rate will be affected. It is likely to move between 2-3%, especially with the decline in consumption and demand. For example, the automotive sector recorded a 25% decline. This coincides with the decline in private sector investment, at a time where government investments are active in infrastructure and new cities and real estate projects.
We should point out that the high interest rate on loans will open new potential for financing through the EGX. Furthermore, Egyptian companies are taking a stand to improve their exports, as the devaluation, primarily, aimed to raise the competitiveness of Egyptian exports.
How do you think loans and external bonds will affect the cost of debt services?
Elalfy: The interest on the International Monetary Fund loan is not high. The ratio of external debt is also still low at 15% of the gross domestic product.
What is striking is not offering long-term bonds of a maturity period of up to 30 years and limiting the available bonds to only 10 years. Issuance of long-term bonds gives the economy the opportunity to move away from the financial burden for a longer period, which enhances the repayment capacity with improved economic performance.
Would the liberalisation of the exchange rate re-edit the list of attractive investments on the EGX?
Elalfy: There are sectors that would strongly benefit, such as banks and financial services. There are other sectors that will see a variation in the vulnerability, such as the consumer sector that would enable companies to raise the prices of cigarettes for example. On the other hand, food companies—evident through Edita and Juhayna—will not be able to pass the entire cost increase to consumers.
There are other sectors that will be affected negatively, such as automotive companies. The impact on exporting companies will vary from one another. For instance, Oriental Weavers exports 50% of its production, but has loans in US dollars, and therefore the impact of the flotation will be neutral.
Meanwhile, the real estate sector is suffering from a decline in demand, especially in high-end units. The interest rate recently increased to 3%, which would raise the cost of issuing securitisation bonds to finance real estate companies. This situation will push companies to offer more facilities to customers to build their projects. On the other hand, demand from Egyptians abroad would increase.
How do you see the size of demand to borrow in US dollars at the moment?
Elalfy: There are companies that worked to convert their debts from US dollars to Egyptian pounds a while ago to avoid the rising cost of financing as the pound weakened against the greenback. Now, moving to borrow in US dollars will be very limited and depends on the companies making revenues in dollars.
How do you see the economic scenarios that will result from the liberalisation of the exchange rate in the next year?
Elalfy: We will find that inflation will exceed 20% and then start declining relatively in the second half of 2017. If exports improved and imports fall while remittances go through the banking channels, the balance of payments will see improvement, which would determine the direction of the currency on the long-run.
What are the features of Mubasher Asset Management’s strategy?
Kotb: We are working on providing financial solutions to individuals and institutions, where we offer services for the four organisations so far, including three local, and another regional institution.
We are now offering three ideas on the establishment of funds to banks and insurance companies to attract individual investors.
What is the size of the portfolio Mubasher runs now?
Kotb: We manage financial portfolios worth over EGP 800m, compared to a very small amount a year and a half ago. We will get into the fund management sector in 2017, whether through managing them on behalf of banks and insurance companies or issuing funds ourselves.
We also have real estate funds before our eyes. They are economically viable, especially in several points, such as investing 70% of the fund in vessels that generate periodic return.
What are the best financial instruments that investors are keen on now?
Kotb: There are financial instruments that will see good demand, such as capital protection funds. They insure maintaining the investment value with the variable return for investors. In addition, fixed income instruments and portfolios will also be more attractive as interest rates at banks hit 20%, in light of the high return on treasury bills and bonds that offer low risk. They are now even more attractive than shares despite the current boom in the EGX.
I think that the current situation has come to activate the sukuk market in Egypt to diversify private funding instruments, as investors prefer tools compatible with the provisions of Islamic Sharia.
Are there new contracts to run private funds on the horizon?
Kotb: We have signed a contract to run a government portfolio of up to EGP 300m. We are also marketing our products to several entities.
The management of these funds makes reasonable commissions for the fund manager of 0.003-0.004%. They are calculated based on the fees of running a fixed-income fund, as private funds invest in fixed-income instruments.
How do you see the issuance of US dollar portfolios on the market?
Kotb: They are no longer attractive. The opportunity for this vessel was available before the flotation.
How can we list investment vessels for small investors?
Kotb: Mid-level real estate is easy to sell, followed by treasury bills, bonds, deposits, and shares.
The global depositary receipt (GDR) was a safe path for foreigners to repatriate their earnings. Will the current situation curb their activity?
Elalfy: When evaluating certificates, the value increased from EGP 13 to EGP 17-18 following the flotation. Now, the value is tied to the banks’ exchange rate. Hence, converting shares into GDRs will no longer be attractive as long as there is flexibility in converting currency, especially as the rules imposed recently limit the conversion of company shares into GDRs to 33% of total shares.
But we may find more demand for companies issuing GDRs to provide a financing source for their operations in hard currency.