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one bourse to rule them all

long-held dreams of a unified, pan-arab stock market appear finally on the verge of becoming reality, with the launch of a six-nation arab bourse scheduled to begin trading in the second quarter of this year. the exchange will feature company stocks from kuwait, jordan, tunisia, lebanon and oman, as well as from egypt’s own cairo & alexandria stock exchanges (case). bourse headquarters will be located in cairo’s smart village.

analysts, meanwhile, expect the unified market to lead to greater arab economic integration, while also boosting the competitiveness of arab home economies and enhancing capital flows into the region. “the arab exchange will be the core of an arab economic union, with the circulation of capital kick-starting a more general arab economy,” case chairman mohamed abdel salam was quoted as saying in september.

the notion was first floated in 2001 by the union of arab bourses, which initially envisioned a total market fusion, with locally listed stocks transferred to a single regional exchange. this ambitious plan, however, presented a number of problems, not least of which was the reluctance of participant countries to yield sovereignty over their respective stock exchanges. “no country wants to sacrifice the integrity of having its own stock market,” noted case deputy chairman maged shawky.

market regulations also served to thwart the idea, as most arab countries – with the exception of egypt, jordan and the countries of the maghreb – have restrictions on foreign participation. this would mean, for example, that investors from countries outside the gulf cooperation council (gcc) would not be allowed to buy the stocks of gcc-based companies.

the scheme, therefore, was reinvented. “instead of merging the stock markets, we’ll have a unified exchange that functions as a trading ‘platform,’” said shawky. in this system, he explained, “the region’s most active blue-chip stocks – without restrictions on foreign participation – will be cross-listed on both the local and the unified exchanges.”

the number of companies to be listed will vary from one country to another, with no less than five from egypt, three or four each from jordan and tunisia, and one or two from lebanon. “initially, the target number of listed companies is from 10 to 15, which is alright as a start,” shawky told business monthly.

listed companies stand to benefit in various ways, say analysts. “cross-listing bolsters a company’s image and is widely seen as an upgrade, which results in higher competitiveness and stronger market positioning,” said cma deputy chairman ahmed saad, citing egypt’s commercial international bank, which is currently listed on three exchanges, as an example.

dina al-sonbaty, senior executive for corporate strategy at efg-hermes, also pointed out that the system would help large local companies attain wider exposure by providing an alternative venue for regional investment. “it will allow companies to gain a wider investor base, which translates into higher liquidity for their stocks and, ultimately, strengthens the local market,” she said. shawky agreed, noting, “egyptian stocks that have been cross-listed in england or in arab countries have very high liquidity. the same will apply to this platform.”

according to hisham ibrahim, a financial expert for egypt’s capital market authority (cma), such cross-listings will also benefit investors by giving them the chance for arbitrage, which involves exploiting price differentials between stocks traded on more than one exchange, as is the case with egyptian global depository receipt (gdr) listings. “arbitrage offers investors the opportunity to strike a generous profit by buying stocks on one exchange then selling them immediately on another,” ibrahim said. “it also helps iron out price differences by balancing supply and demand in both markets.”

with the region awash with excess liquidity after mass repatriation of arab capital post-9/11, a pan-arab exchange can also be expected to soak up some of those stray funds. “excess liquidity in the region – currently directed towards real estate or bonds – needs to be channeled in the right direction. a unified exchange will fill that void,” said shawky. he went on to explain that public offerings in saudi arabia, for example, were often wildly over-subscribed, raw evidence of excess liquidity. “the arab exchange in effect creates a supermarket, displaying products from different places, as opposed to buying the same product over and over again, and subsequently raising its price,” he said.

while some observers have expressed anxiety that a unified change would have the effect of retarding trade in home markets, saad suggested that, contrarily, it would serve to rejuvenate local stock markets. “the unified exchange will raise investment awareness, and consequently boost the performance of all stock markets in the region,” he said.

with the aim of eliminating forex-associated risks, trading will be done in either the euro or the dollar, although the latter seems a likelier choice. the exchange’s legal and regulatory structure, meanwhile, will be managed by the union of arab bourses, with designated committees hashing out rules governing listing and delisting, the admission of brokerage firms, and monitoring and oversight issues. the exchange’s clearance system will be handled by egypt’s misr for clearing settlement & central depository (mcsd), while hsbc bank will manage settlement operations.

as for promotion, this will fall to local brokerage efg-hermes, which is scheduled to launch a road show in early 2005, during which arab blue-chip companies will be invited to list. “a lot depends on how the exchange is marketed, because it’s not obligatory,” noted shawky. “companies have the freedom to choose not to list.” according to al-sonbaty, “road shows will involve the six countries, the first round of which will start in egypt and kuwait, considered the biggest, most active markets.” she added that efg-hermes hoped to rack up “around 10 companies” from both countries.

meanwhile, some firms have raised points of concern, not the least of which has to do with the substantial fees and commissions required to list, although, according to al-sonbaty, these have been reduced considerably. some companies might also be deterred by formidable transparency and disclosure requirements.

according to saad, however, even if there are a few initial hiccups, they’re expected to be minor. “there could be a few systemic difficulties in the beginning, due to the different market cultures and legalities, but those will be contained,” he said. while ibrahim pointed to “initial studies” indicating that the exchange would prove “a success story,” saad was a little more guarded. “a stock exchange is a market, and its success will depend on the mechanisms guaranteeing the ease and speed of matching supply and demand,” he said.

nazly shamel

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