Share prices continue to fall despite positive economic indicators, writes Sherine Abdel-Razek With the market shedding 15 per cent of its value during the first three trading days of this week the Bourse management was forced to intervene on Tuesday, halting trading for an hour after shares across the board fell by more than the permitted five and 10 per cent. Most indices hit record lows. CASE 30 closed 7.6 down at 5112 points. The Hermes Financial Index lost 6.9 per cent to close at its lowest point in eight months. Since late January the market has declined in value by 38 per cent. Between early February and 23 May LE148 billion had been wiped off the value of shares. The correction had been anticipated, and financial analysts moved quickly to calm investors, arguing that the bottom would soon be reached after which the market would pick up again. Yet despite sound economic indicators and what should be attractive share prices, the downward pressure shows no sign of abating. So what is going wrong? Tuesday's slump appears to have been the result of international jitters, fed by worries that an increase in interest rates would feed inflation. The Morgan Stanley Capital International Emerging Markets Index, which tracks shares in 26 developing countries including Egypt, has fallen 15 per cent in the last two weeks amid concerns that rising interest rates will slow economic growth and reduce demand for equities. The losses were the most significant since August 1998, a downward spiral that was halted only when Russia devalued the rouble. On Monday exchanges in Russia and India halted trading for an hour as share prices plummeted. Moscow's Micex Stock Exchange closed 15 minutes early, while India's Sensitive Index fell by more than 10 per cent, rallying only after the government said banks would help investors by increasing liquidity. On Tuesday the Ministry of Investment issued a statement saying the selling spree by foreigners in emerging markets had precipitated the fall in prices. "It started with foreigners selling some of their holdings which raised fears among local retailers who also started to sell heavily," said the statement. "The falls are difficult to justify any more," says Hussein El-Sherbiny, chairman of Prime Securities. "All the fundamentals are good, the macro economic picture has never been better and shares are at very attractive levels. It is a very good time to buy yet all we see are people selling." It is a phenomenon that El-Sherbiny can explain only by reference to the psychological profile of investors. With small retail investors driving the Egyptian market, sentiment and mood have overtaken the anaylsis of fundamentals in determining prices. In recent days, says El-Sherbiny, the market has been driven by rumours. Stories of the resignation of the CMA and the CASE heads, and of a heavy weight Arab investor liquidating LE2 billion worth of his holdings in the local market, were widely circulated, feeding a growing sense of panic. Yet Egyptian economic indicators released during the World Economic Forum are, if anything, encouraging. International reserves have hit an all time high of $23 billion. The inflow of foreign direct investments is growing, with foreigners buying heavily into Egypt's banking and petroleum sectors. The market average price earning ratio, at eight to 10 per cent, is among the lowest in the region. In the Gulf states, even after the recent 50 per cent decline in prices, P/E ratios are 20 per cent or more. The consensus is that Egyptian blue chips are now trading at unrealistically low prices. "Take Telecom Egypt. How come that with all its strengths, starting with a monopoly position of fixed line phones in Egypt, sound financial results and possibility of it acquiring Egypt's third mobile license, its shares are being traded at LE 11, just one pound over its nominal value of 10?" asks El-Sherbini. A trader at one of Egypt's four largest brokers blamed Same Day Trading for the declines. Brokers receiving selling orders on shares included in the system must sell the shares before the end of the trading session. "Sometimes we do so at very low prices adding to market pressure," he said. But as El-Sherbiny points out transactions under the system have accounted for only 1- 2.5 per cent of daily turnover since it was introduced in November. Less controversial are suggestions that, with small retail investors now accounting for more than 70 per cent of the market, it has become increasingly vulnerable to panic attacks. El-Sherbiny believes that worries over the ongoing confrontation between the judges and the government, concerns over the appeal of opposition leader Ayman Nour, and the Dahab bombings have inevitably added to market woes. Yet most experts believe that the market will rebound in the short run as commodity prices and oil begin to stabilise. Tuesday's increase in GDRs traded on the London stock exchange seems to reinforce such a prognosis. But a longer term recovery, believes El-Sherbiny, can happen only if retail investors change their habits. "They should look at the market as a long- term investment and not as a casino where quick gains can be made." The CASE 30 index had increased by six per cent by noon yesterday.
