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How low can you go?
Published in Al-Ahram Weekly on 27 - 05 - 2010

Jittery investors are exiting the market at the least hint of uncertainty, writes Niveen Wahish
Egypt's stock market received another knock on the head this week with news of escalating tension between the two Koreas and continued trouble in the Eurozone. The stock market's main index EGX 30 lost 6.07 per cent on closing Tuesday. The EGX 30 includes Egypt's top 30 companies in terms of liquidity and activity. This is the toughest fall in months, even steeper than the levels witnessed following the outbreak of the Greek crisis. The market had been on a downward trend since the trouble in the Euro zone falling between four and six per cent each week.
In fact, the trend was for the market to end the week on a low. Hany Genena, chief economist at Pharos Holding for Financial Investments, a local investment bank, explained that on more than one occasion investors left the market in good shape on Thursday, but events over the weekend -- and often abroad -- caused it to crash on Sunday. "Having been bitten before, investors now opt to play it safe," he said.
Before the Greek crisis escalated, Egypt's stock market had been stable. According to Genena, performance was flat, with the market going up or down depending on company specific events. Volume had been good, reaching LE2 billion in trading values per day. "The market was extremely healthy and confidence had been returning." That confidence had been spurred by good news in major sectors, such as banking and real estate, he explained. Moreover, the US market had been doing well and was pulling all global markets with it. But before investors could get too comfortable, on came the Greek crisis, causing foreigners to sell and Egyptian investors followed suit.
Foreign and Arab investors make up around 22 per cent of total investors in the market, the rest local. The market is also characterised by 61 per cent investment by individuals and 39 per cent by institutions. But it is not the composition of the market that worries Genena; rather, it is the shares of some companies that are increasing unrealistically in value and for no good reason. But even that was not the case, said Genena, adding that companies were trading at a fair value and the market was not overheated.
That taxes are to be raised on cement, steel and cigarettes was not expected by the market. Genena believes that while no panic ensued, the news did cause investors to ask the question, "What's next?" Genena believes that though the new taxes mean that the margins of companies producing these items will be squeezed, the news is a positive indicator that the government is on track towards fiscal consolidation. "To impose a tax on cigarettes in an election year is a bold move." To Genena, it indicates that the government will stick to the reform track regardless.
How long the market downturn will continue remains unknown. According to Genena, it depends on what happens in Eurozone. "If the uncertainty continues, we will follow." As long as the problem is not local, he said, nothing could be done locally to better performance. Egypt's economic indicators should encourage investors to enter the market and prices in the market are a good entry point, provided the situation stabilises.
Amr El-Alfy, an analyst at CI Capital Holding (CICH), also believes that raising additional taxes may have increased investor worries. To investors, additional taxes indicate increased inflation and accordingly higher interest rates. On the flip side, he said that a stronger Egyptian pound as a result of the depreciation of the Euro could balance out inflation.
On local efforts to improve market performance, El-Alfy said stock market management could be stricter when it comes to better disclosure by companies. He believes that demands that the head of the Egyptian Stock Exchange, Maged Shawki, act are exaggerated, particularly since he is part of a system and does not take individual decisions.
El-Alfy also said that the introduction of short selling is long overdue. "Investors trading on short selling could balance the market when it is on a downward trend," he explained. Short selling is an investment technique where an investor only makes a profit if the value of shares drops.
El-Alfy also said the relative weighing of companies in the EGX 30 needed to change, so that movement in a few major stocks does not drastically affect the index. He explained that the reason the market drops as soon as foreigners pull out -- although they constitute around 20 per cent of investors -- is because the main stocks they invest in are EGX 30 large caps like Orascom Telecom, Orascom Construction Industries, Commercial International Bank, Telecom Egypt and EFG-Hermes.
"These are the stocks that make up the bulk of the index market capitalisation, hence affect the index the most. If they pull out of Egypt as a whole, they pull out of those stocks, which pressures those stocks' prices down, and hence the EGX 30."


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