Profits are sagging at some of Egypt's biggest companies in a fresh sign the country's revolution continues to take it toll on its economy.
Banking and property have been among the sectors hardest hit by the revolution and the political uncertainty that followed, analysts say.
Commercial International Bank, Egypt's largest lender, has announced an 11 per cent decline in second-quarter profits, compared with the same period last year, to 443 million Egyptian pounds (Dh272.5m).
Profits at Talaat Moustafa Group, one of the country's biggest developers, slumped 40 per cent in the second quarter to 202m pounds. Palm Hills Development, another big property player, is projected to lose 45.3m pounds in the second quarter.
"To book profits you need to deliver the unit, and in the current political environment we did have some delays in construction," said Jan Hasman, an analyst at EFG-Hermes.
"The country was at a standstill during the most crucial events of the revolution, and some of the construction could not be delivered."
Banks, meanwhile, have taken a hit because of companies' reluctance to buy equipment or to borrow to expand their businesses in the current uncertainty. They are also feeling the brunt of a decline in trade to and from Egypt - financing commerce made up a substantial part of some banks' business.
"For banks the main negative effect was in the first quarter, when there was a clear drop in loan growth driven by lower capital expenditure and loan demand," said Tarik El Mejjad, an analyst with Nomura in London. Take a deeper look at the state of Egypt's biggest listed companies, and analysts say the picture gets far more complicated.
Property companies, for one, are beset by obstacles that extend well beyond delays in construction. In the short term, some of them are still booking profits for projects finished years ago, which is partly obscuring the financial effect of the revolution. But a long-term stagnation in sales and flagging demand for new projects could put a serious dent in future profits.
Analysts are already forecasting slower profit growth into next year for Orascom Construction, the country's biggest builder. Analysts point to other worrying signs, such as a rise in the number of people getting refunds of deposits put down in better economic times.
There is also concern about a lack of new sales and possible problems for some developers completing projects they have promised to build. "With Palm Hills Development we do have some concerns about its liquidity and its ability to fulfil its commitments to its customers," Mr Hasman said. The company posted an operating loss of 73m pounds in the first quarter.
Compounding that sad state of affairs, executives at some of the biggest developers in Egypt, including Palm Hills, have been hauled into court amid allegations of improper land grants by the government of the former president, Hosni Mubarak. In a market where mortgages are a rarity and off-plan sales are the norm, avoiding such bad publicity and keeping trust intact was a top priority, Mr Hasman said.
"It's a market based on trust," he said. "You have to have trust on both sides. The buyer has to trust the developer that the property will be delivered according to specifications. The developer has to trust the client that once they construct the unit the client will pay."
While banks and property companies have taken huge hits after the revolution, Egypt's big telecommunications companies - Orascom Telecom, Telecom Egypt and Mobinil - have had a relatively problem-free time. Many suffered outages at the height of January's protests, but none had a significant amount of equipment destroyed, said Sally Gerges, an analyst with Beltone Financial in Cairo.
"There was theft of cables, damage to infrastructure, and they couldn't maintain some of their base stations because of the low security," she said. "But nothing has been booked in their statements as yet, and even if it were to be booked, I wouldn't expect it to be very significant."
Still, new subscriptions to telecoms services have taken a dive, she concedes, and the continuing lack of clarity about the structure of a new Egyptian government and its telecommunications regulator pose serious risks for the country's overall economy.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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