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Summer of freefall
Published in Al-Ahram Weekly on 14 - 08 - 2008

The stock market is in a nose dive. Sherine Abdel-Razek asks where investors should head from here
The local bourse usually witnesses a summer lull during the months of July and August, when investors cooling off away from Cairo limit their exposure to the stock market's fluctuations. But this year, it is more than just a slow and relaxed trading atmosphere. The market began the summer slack as early as May, with the Cairo and Alexandria Stock Exchange (CASE30) melting down by almost 25 per cent from its record peak of almost 12,000 points at the end of April. It dropped to its lowest point in the past year on Monday, when transactions ended at 8,489 points.
The decline was triggered by the negative impression which hasty government decisions left with investors in early May. By ending free zone benefits for energy-intensive industries, the government was seen as retreating from investor-friendly policies. The decision to halt work on the Canadian E Agrium Petrochemical plant in Damietta also fed this perception.
This was accompanied by worldwide economic upheaval due to increased inflation, a retreating dollar, the aftermath of US subprime crisis, and worries about food supplies due to increased use of bio-fuels. All these factors weighed down on international markets and contagiously moved to the local level. While foreign investors returned as buyers in the market, the harm was done and local retailers started pulling out of the market for fear of further losses.
In addition, the market was already overvalued by speculations before the decline began, and a correction was expected. "It is hard to predict the depth of the correction, but we never expected it to be that intense," according to Sherif El-Seweisi, head of technical analysis at the local investment house Delta Rasmala.
Said Mohamed Fahmi, senior analyst at Prime Securities, believes that, "there is no positive news on either the micro and macro levels to pull the market out of its plunge." Fahmi explained that while listed companies are realising positive results, the growth rates in their bottomlines are not as impressive as those of 2007 -- a factor which makes investors have second thoughts about those shares. "Also, there is no investor appetite due to summer vacations," he pointed out.
Fahmi revealed that the previous upward trend was a prolonged one which lasted from the second half of 2007 until April 2008. "Usually, the correction following a prolonged trend is steep," he added.
Nonetheless, market analysts believe the market will reach the bottom of the downward trend and head upwards in the short term. Fahmi feels that at a Price Earning ratio (P/E) of 11 times, the market is at one of its most attractive price levels. He believes that a fresh supply of traded companies on the market would pull it out, a move that is not expected before the end of Ramadan which is usually characterised by slow transactions.
Technical analysis which looks at the market's past performance and identifies the CASE30's weak and strong points to predict future performance, suggests that the long term outlook is positive. El-Seweisi explained that the Reward Versus Risk ratio, a method measuring expected increases in the market versus possible declines based on historical data and moves in the CASE30 index, is 3:1. According to the analysis of historical data, a year from now the market will either be 30 per cent up or 10 per cent down, he added, making the reward risk ratio 3:1 a very positive one.
But what about the short and medium terms? HC Securities predicted a pending upward correction which will be beneficial for both short- and medium-term investors. "Our current analysis continues to suggest an upward correction on the short-term horizon," noted a recent HC report, which projected that the CASE30 will move up and be supported at either 9,970 or 10,200 or 10,500 points.
HC advised short-term investors who want to stay in the market for less than three months to use this upside correction for realising short-term profits from capital gains. Medium-term investors, who would like to pull out of the market in six months, should use this upside correction to "reduce their exposure in the market" or to sell their holdings.
As for long-term investors, it is a buyer's market. El-Seweisi gives those investors an "accumulate" recommendation, meaning that the investor should start by using only a percentage, say 50 per cent, of the available cash in buying stocks. "If the market goes up, he adds 25 per cent more; if it goes down he liquidates half of what he initially put, and so on," calculated El-Seweisi. "This hedges him against severe fluctuations."

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