The force of gravity

Waleed Khalil Rasromani
6 Min Read

CAIRO: They called it Black Tuesday. Four days of panic selling on the New York Stock Exchange ended on Tuesday, Oct. 24, 1929 with share prices at only a quarter of their peak earlier that year. The event shocked financial markets around the world and precipitated the Great Depression, and the stock market took 25 years to recover. Following the dramatic crash, stock exchanges worldwide adopted measures to temporarily suspend trading when prices suddenly decline.

On Tuesday, March 14, 2006, the temporary suspension of trading may have saved the Cairo and Alexandria Stock Exchanges from even more spectacular losses. By 11 a.m., when the half-hour suspension was triggered, several shares had lost as much as 20 percent of their value. By the end of the day, the CASE 30 index, which tracks the top 30 companies on the stock market, dropped by 6.4 percent, closing at 5,892.73 points. The index has since recovered somewhat, closing at 6,370.73 this week compared to a high of 8,140 in January.

Al-Ahram Weekly also reports government involvement in trading on Tuesday to decelerate the decline. The government intervened to save the market, an anonymous trader tells the Weekly. We were given buying orders not at current levels but at prices that were 5 to 10 percent higher, especially for blue chips like MobiNil, OT (Orascom Telecom) and Telecom Egypt.

In the aftermath of the event, EFG-Hermes issued an updated strategy note on Wednesday with a detailed opinion of the decline and their medium-term outlook for the stock market.

The stock market as a whole experienced substantial gain between November and January and most observers had expected a correction to eventually occur. Price-to-earnings multiples based on earnings forecasts for 2006 averaged 15.1 times last week. After Tuesday s decline, shares traded at 13.5 times their estimated earnings for the year and 11.6 times their estimated earnings for next year. The correction has brought Egypt valuations back in line, below emerging market levels, says EFG-Hermes.

In conformity with other analysts, the brokerage firm believes that the extent of the correction in Egypt has been exacerbated by the steep corrections occurring in key GCC markets.

In Saudi Arabia, where as much as one-third of the population participates in the stock market and investors can subscribe to initial public offerings with their ATM cards, share prices recovered by 4.7 percent on Thursday after a week of severe battering. The recovery followed King Abdulla s announcement that the Saudi government is considering allowing foreign investors to participate in their capital markets. The king ordered the proposals be studied urgently and the necessary measures be taken to realize them, Saudi Finance Minister Ibrahim Al Assaf tells the official Saudi Press Agency.

Saudi Prince Alwaleed bin Talal, the world s second-richest investor and fourth-richest person, also announced on Wednesday that he will invest 10 billion Saudi riyals ($2.6 billon) in his country s stock market. What happened a few months ago on the Saudi market is that speculators dominated the market and created a bubble, Asharq Al-Awsat newspaper quotes the prince as saying.

EFG-Hermes, however, adds that the Egyptian stock market is not comparable to those in the Gulf. While we believe the declines in the GCC markets to be warranted, the strategy note continues, we do not believe the same applies to Egypt. Many of the GCC markets are coming from very high absolute valuations, low quality earnings and low quality earnings growth.

Echoing Prince Alwaleed s observations of the Saudi stock market, speculators have also aggravated the situation in Egypt. The higher involvement of mostly inexperienced short-term oriented retail investors, sometimes leveraged, resulted in a prolonged sell-off, EFG-Hermes explains.

The brokerage firm also believes that the nature of investors has changed subsequent to the correction. Anecdotal evidence suggests a significant shift from momentum-based investors to fundamentals-based investors, it adds, with Western investors being net buyers.

Institutional investors accounted for 60 percent of the market and were mostly buying shares with attractive valuations. Meanwhile, EFG-Hermes believes that the majority of retail investors that had bought shares on margins have exited the market. As a result, the firm believes that the correction phase is near its end.

Its medium-term outlook is that strong economic conditions will support the market, but that the resumption of capital flows from the Gulf are uncertain and are fundamental to their positive view of the market and particularly for small capitalization stocks. The questions today are whether the significant corrections experienced in GCC markets will render the differential too small, the firm explains, and whether GCC investors will lose faith in equities generally (a worst-case scenario).

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