Pensioners to the rescue

By: Niveen Wahish
Al-Ahram Weekly, September 10-16, 1998

A recent announcement that some LE900 million of pension and social insurance funds will soon be injected into the stock market has been well received by stock market enthusiasts. 

The money will be invested in the capital market via three portfolios representing the pension and social insurance funds of government employees, the public and private sector and the National Investment Bank. The portfolios will be managed by EFG-Hermess, Concord International and Hussein Choukri brokerage company. 

Hesham Tawfiq, managing director of EFG-Hermess, thinks that the investment of pension funds has been a little slow in coming, but is thankful all the same: "Thank God it has finally happened." 

Behind the pension fund injection is Social Insurance Minister Mervat Tallawy. Since coming to office she has consistently stressed that her ministry was studying how best to diversify the investment of pension funds. In previous statements she had said diversification was needed to supplement funds allocated in the budget for pensions. 

According to Tawfiq, pension funds worldwide are willing to accept the risks involved in long-term investment in the capital market because its revenues are so lucrative. Although the investment at this specific time has been seen by some as a government move to bail out the market, Tawfiq denied this was the case. In fact, he believes the move could not have come at a better time because share prices are very low. "The market has fallen 47 per cent since February 1997. We have reached rock bottom or close to it and should hopefully be bouncing back again soon." 

Sounding a similar opinion, Nashaat Abdel-Aziz, financial analyst for Egyptians Abroad for Investment, a brokerage company, said that, due to the present low share prices, investors entering the market now could expect to make around 20 to 25 per cent profit, provided the market performance improves. He emphasised that investments should be medium- to long-term, that is shares should be kept for at least one year.

Abdel-Aziz did not overlook the fact that, despite positive expectations, this money may be exposed to risks. However, he said that losses would not endanger pension funds as a whole because only a very small portion of those funds will be invested in the stock market. Pension and social insurance funds are estimated at over LE85 billion, of which the LE900 million earmarked for the capital markets represents only a fraction. 

Approval for the investment of pension and social insurance money in the capital market was only recently granted by the cabinet when it agreed to modify existing laws forbidding such uses of public funds. For example, the public budget law required modification because it deemed social insurance funds to be part of public budget revenues available for current expenditure. Likewise, changes were made to the law regulating the activities of the National Investment Bank, which stated that all the bank's resources from pension and social insurance would be used to finance the government budget at an interest rate of 13 per cent. 

Despite official denials that the pension cash boost was strategically timed, stock market observers say that the prospect of imminent investment by pension funds has done the trick. Ahmed El-Helw, managing director of Intercapital Securities, said that "the market has already gained some lost ground." He explained that there has been a psychological recession; most people, he said, had lost hope that anything would happen to curb the market's downward trend. The uncertainty created by several events earlier this year, including the issuing of tax law No. 5 and the overvaluation of the shares of several public sector companies, had made investors wary of getting involved in the market. This was made worse by the delay in the placement of the long-awaited shares of companies in the services sector. 

El-Helw believes that the asset value of Egyptian shares is very good. "In fact it makes Egypt one the best investment markets," he said, pointing out that what was required was a technical factor to help turn the market around. The news about the pension money was just what was needed. He also described as groundless fears that increased demand will lead to overvaluation of shares, since prices are far lower than they were when the market was at its peak. 

Nonetheless, Mounir Hindy, professor of finance and financial institutions at the University of Tanta, strongly believes that any improvement in capital market performance as a result of the entry of pension funds will be short-lived. What is worse, according to Hindy, is that it will lead to a temporary increase in share prices, giving professionals the chance to sell what shares they have. 

He also described as misguided the government's belief that it can halt the downward spiral of share values by increasing demand. According to Hindy, this is to miss the point because the problem with the capital market is not one of a lack of liquidity. "Before increasing demand, we need to deal with the underlying reasons which caused buyers to hesitate in the first place," said Hindy.