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Market free fall
Published in Al-Ahram Weekly on 16 - 03 - 2006

Sherine 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)


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