Al-Ahram Weekly Online   9 - 15 October 2008
Issue No. 917
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Published in Cairo by AL-AHRAM established in 1875

Post-Eid freefall

Egypt might not be in the middle of the international financial crash. However, the local stock market cannot escape the pinch, Sherine Abdel-Razek reports

For a month now, screens monitoring the movement of share prices in the world's stock markets have been flashing red, the colour of losses. Indices around the globe are heading South, without exception, and no one knows where the bottom will be.

While the initial reaction of international markets to the globally-coordinated rate cut decision yesterday was positive, the action failed to support sentiment for long, with European markets closing lower due to a lack of confidence in the health of financial institutions worldwide.

Despite government assurances that the Egyptian economy is fundamentally strong and the banking sector well-regulated, Egypt is being buffeted by the storm sweeping global markets. The CASE30 index recorded its highest daily fall since its inception in 1998, losing almost 27 per cent of its value during trading on Tuesday and early Wednesday, as Arab and foreign investors scrambled to unload stock.

The unprecedented fall in share prices followed the halt in trading during the Eid Al-Fitr and 6 October public holidays, and took even the most pessimistic observers by surprise.

"Tuesday's decline was dramatic because it came after a week of holidays during which investors' fears had built up as they watched markets plunging elsewhere," says Mohamed Abu Basha, an economist at EFG-Hermes. "Elsewhere the falls were less steep because the markets had a whole week in which to move."

The downward trend continued on Wednesday, and not just in Egypt.

"We have a strong correlation with international markets," points out Sherif El-Seweifi, head of technical analysis at Delta Rasmala. "Foreigners account for at least 30 per cent of transactions in the local market."

An EFG-Hermes report issued in August reinforced anecdotal evidence suggesting the Egyptian market is the region's most vulnerable to external shocks given the heavy presence of Western institutions.

Correlations between international equity markets typically increase during periods of high volatility and crises. "They move south and we follow," says El-Seweifi.

Global Depository Receipts (GDRs) have allowed the contagion to spread as investors who shouldered double digit losses in GDRs traded on the London Stock Exchange on Monday off-loaded local sister shares when the local market opened on Tuesday, according to Abu Basha.

Companies with shares traded as GDRs include Orascom Construction Industries, Orascom Telecom, EFG-Hermes and Commercial International Bank (CIB), the Egyptian market's heavyweights that constitute the bulk of the CASE30 index.

Across the region governments are trying to contain the problem by injecting money in the banking sector, as is the case in Kuwait, Saudi Arabia and the UAE, and encouraging mergers between companies threatened by the crisis. Two of the UAE's largest real estate companies merged earlier this week, while Kuwait directly injected money into the market through its Sovereign Wealth Fund. On Tuesday investors lobbied the Kuwaiti investment authorities to halt transactions as it did in 2001, with the beginning of the war against Iraq, in an attempt to staunch the bleeding.

So will Egypt follow suit?

"The banking sector here does not need liquidity to be injected and the real estate sector is doing OK so far," says one trader at a leading local brokerage. "The heavy selling we have been seeing is a knee- jerk response. Investors know that financial sector and real estate companies have been hardest hit internationally and assume the same scenario will be repeated here."

He does not anticipate the government intervening in the market to buy shares as long as the selling pressure remains high. "The government will wait till the trend runs out of steam and the market finds a bottom. Then it might intervene through pension or investment funds to give the market a push upwards."

Abu Basha agrees. "We are not facing a temporary local problem that buying orders can solve. It's a global thing and is expected to continue for a while."

But where is the bottom likely to be?

"We expect the market to continue to fall till it reaches the 4,600-5,000 point range, after which it should stabilise for a while before either heading north or south, depending on what happens globally," says El-Seweifi.

Analysts agree that local market authorities cannot do anything about the situation since it is basically a question of supply and demand, but argue that panic selling by retail investors is distorting share prices.

"This is something that we have to work on," argues one trader, who requested anonymity. "The ratio of individual retail investors to foreigners is 70:30. The latter should not be leading the market, yet local investors follow the foreigners' lead. No matter what the logic behind buying or selling orders foreign investors set the trend."

"It is understandable that shares in financial and real estate companies decline on the back of worldwide movements but there are company shares around that have very strong fundamentals and they are being sold for peanuts." (see p.15 and Editorial p.18)

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