Soapbox:

Revealing the CASE code

By Doha Abdel-Hamid

---

Prior to the recent events of Black Tuesday and Wednesday, Egypt's stock exchange had attained unusual highs. The Black Tuesday saga was replicated on Black Wednesday, just a few weeks later, because of speculative activities. Same-day trading alone cannot be blamed for the phenomenon.

With some hindsight, we might remember that the stock exchange had previously plunged to one of its historical lows over an extended period of time. One must question then if it is purely coincidental that Wednesday followed Tuesday? Or was there a causal relationship between the market's recent drops and earlier extended backlashes.

Rumours and external crashes appear to continue to influence investors' sentiments in the local market, in the absence of any substantiated evidence. The full brunt of such adverse events is normally shouldered by retail or small investors. Institutional and wholesale investors on the other hand are sophisticated enough to resort to effective research tools, thus diversifying their portfolios by investing in an array of well-chosen securities and reducing their risks. Retail investors, on the one hand, in pursuit of high returns, tend to invest the greater part of their portfolios in a limited number of financial assets which increases their risk.

Investors' awareness-building programmes are subsequently called for, given the recurrence of volatile price cycles. There is a need as well for increased financial instruments for portfolio building. Diversification and prudence in investment decisions should contribute to consolidating the market and shielding it from future fluctuations. Enforcement and compliance mechanisms for corporate accountability and transparency should also be made indispensable from this point onwards.

It is time to learn from the dramatic lessons of the past, and to seek immediate solutions which will reduce the likelihood of occurrence of such events. Should this happen, retail investors in Egypt will eventually be able to decipher the CASE Code.

* The writer is a professor of finance at the American University in Cairo.