Corrective measures
Is the market now in freefall? Sherine Abdel-Razek investigates
"The market has gone berserk. Forget about rational valuations, price-earning ratios and growth fundamentals, we have turned into a frenzied mob in front of a roulette wheel," said Bassim Arida, director of international sales at Commercial International Brokerage Company two weeks ago, as the stock market continued to spiral upwards.
"Tighten your seat belts, we are going to be in for a rough ride," was Arida's advice.
Last week that advice appeared to have been vindicated as the market began the correction long-anticipated by many analysts. Indices slipped 10 per cent on average, and the list of losers included almost all blue chip stocks as the gains of the last four months were wiped out almost overnight.
"It was expected. The market has been in a marathon for the last year and at some point it had to become exhausted," says Nashwa Saleh, head of research at Prime Securities.
The market has grown by 150 per cent over the last 12 months, the highest of any emerging market. And while it is no stranger to correction -- there were readjustments in both February and March last year -- this time things are different. The earlier corrections both came in the wake of unfavourable economic news, though not this time.
Saleh and Arida, along with many analysts, agree that the market's recent performance was driven by speculations and following the huge rises in share prices seen in December -- it was inevitable that a readjustment would take place.
"There is an improvement in the overall economic atmosphere and a better than expected increase in company profits due to tax reductions," says Saleh. "But share- prices were still overvalued."
A healthy price earning ratio, she points out, should be around 13 per cent, whereas in 2005 it averaged out at 21 per cent. Saleh estimates it has probably fallen to 18 per cent now, which still suggests that the market is overheated.
"Solid increases are determined by good financial results and increased production, not just by rumours of mergers or changes in ownership structure," says Mohamed Fahmi of Prime Securities.
Companies like SODIC and Arab Cotton Ginning have inexplicably been among the market's recent leaders, with SODIC registering gains of more than 7,000 per cent over the last year. Such increases have been fuelled by Arab funds seeking to diversify portfolios and speculate on the relatively cheap Egyptian market, and by new small investors who entered the market with last year's IPOs.
Maged Shawqi, head of the Cairo and Alexandria Stock Exchange (CASE), puts the number of individuals joining the market during the second half of last year at 230,000.
It was new investors, believes Fahmi, who were the first to panic for fear of further declines and only experienced investors and funds have remained.
While there is a general consensus on the reasons behind the sharp increases and subsequent decline there is less agreement over the direction of the market in coming weeks.
"I think it will decline further. It has 10 per cent more to shed before it stabilises," believes Saleh. The IPOs of Bank of Alexandria and Misr Aluminium might help, she thinks, but only if they are reasonably priced. "If not," she predicts, "it might take three months for the market to start moving up again."
Arida disagrees, believing the market to have already reached the bottom of the trough and that "the forthcoming financial results of listed companies will help revive it".
2005 results should have been published mid-month but so far only a handful of companies have hit the February deadline, a delay that might have lent weight to last week's downward pressure.
"As we abandoned rational investment decisions it became harder to predict the direction of the market. There is good liquidity in the market and sound stocks but there are still some speculators there," says Fahmi.
Al-Ahram Weekly Online : Located at: http://weekly.ahram.org.eg/2006/783/ec1.htm