[Dialogue] Market free fall

[Harry Wainwright]

Market free fall

Sherine
<mailto:srazek at ahram.org.eg?subject=Front%20Page%20::%20Market%20free%20fall
>  Abdel-Razek reports on the stock exchange's "black Tuesday" 

While the stock market, which in January had registered record highs, was
widely expected to undergo some readjustment -- with most analysts saying
early in the year that it had overheated -- Tuesday's nose-dive took both
investors and market traders by surprise. On Black Tuesday, as it is being
called, the value of shares fell by 11.8 per cent -- and that was just on
trading before noon.

One trader, speaking on condition of anonymity, said the downward spiral was
fuelled by Saudi investors, busy unloading stocks to compensate for losses
incurred in other regional markets where the decline was even steeper. The
value of Gulf bourses dropped on Tuesday to under one trillion dollars, down
$150 billion dollars from their 2005 value and more than $250 billion
dollars below last year's peak. The Saudi market has lost 27 points in the
last two weeks, while the Kuwait bourse closed last week at its lowest level
for six months, triggering angry demonstrations outside parliament as small
investors urged MPs to intervene. 

The Dubai financial market and Abu Dhabi Securities Market ended last week
40 per cent and 22.7 per cent down respectively, dropping to below their
2005 closing levels. 

Watching the declines, panicked small investors rushed to brokerages to sell
their holdings for fear of increasing deterioration, pushing the market
further down.

After a majority of the most actively traded shares registered losses of 20
per cent or more, the Capital Market Authority intervened and halted trades
on the Cairo and Alexandria stock exchanges for 30 minutes to help ease
tensions.

Local and international investment funds rallied themselves, preparing to
buy stocks at the now attractive low price, but they were pipped to the post
by public-owned pension funds which began an aggressive buying spree. 

"The government intervened to save the market. We were given buying orders
not at current levels but at prices that were five to 10 per cent higher,
especially for blue chips like MobiNil, OT and Telecom Egypt," he explained.


When trading resumed the position had stabilised and the market closed 6.3
per cent lower than the previous day. 

While the problem on Tuesday was mainly caused by Gulf investors pulling out
of the market, a one off situation, the panic that ensued among small
investors could well become a perennial problem. 

"Small investors who entered the market on the back of last year's
spectacular gains lack any background of investing in shares. If they are
looking for a guaranteed return they should look elsewhere than the risky
stock market. They must at least understand the fundamentals of trading and
not put all the eggs in one basket," said Nashwa Saleh, head of research at
HC Securities.

In the second half of 2005 thousands of inexperienced investors entered the
market for the first time, lured by gains in share prices following the IPOs
of SIDPEC and AMOC. Saleh recalls anecdotes of people selling gold and cars
to invest in the market during Telecom Egypt's IPO, which was almost 10
times oversubscribed. 

Analysts agree that before the decline the market was overheating, with the
CASE30 index having gained almost 40 points between mid-November and the end
of January. 

"Market capitalisation shot up to more than 90 per cent of GDP, not
necessarily a good thing when economic growth rates and companies'
fundamentals do not reflect such an increase," said Saleh. "In the more
developed regional markets, such as Morocco, it took five years of five to
seven per cent growth rates to achieve a market capitalisation equivalent to
35 per cent of GDP." 

In a report released this week HC Securities noted that the market appears
to be following an easy come easy go principal. 

The correction, which saw the Cairo and Alexandria Stock Exchange fall from
its record high of 8140 points in late January to reach 5892.73 points by
the close of trading on Tuesday, is comparable to the decline that occurred
between 13 and 30 March 2005, when the market lost 18 per cent. That fall,
too, had been preceded by massive increases. 

The fall has been particularly painful for benchmark stocks such as EFG
Hermes, which closed on Tuesday at LE35 compared to LE280 just one month
ago. 

Saleh predicts that the market will remain in the doldrums for two to three
months before bouncing back, a prognosis with which the anonymous trader
agrees. He predicts that the market could still shed 10-20 per cent of its
value before hitting rock bottom, after which it will begin to climb again. 

Market observers believe many investors are waiting for the CASE30 to
decline to 5500 points before they begin to buy again. Hani Sarieddin, head
of the Capital Market Authority, was quoted in London by Reuters as saying
that the low price levels that have followed the adjustment will increase
the attractiveness of the Egyptian market, which has a 12 times
Price/Earnings ratio, to investors. 

Attracted by Tuesday's appealing lows, institutional investors bought
heavily into the market on Wednesday, stirring an overall positive
sentiment. Shares across the board gained ground, pushing CASE 30 up by 7
per cent to close at 6309 points. (see market report, p.5) 

C Copyright Al-Ahram Weekly. All rights reserved

Al-Ahram Weekly Online : Located at:
http://weekly.ahram.org.eg/2006/786/fr1.htm 

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