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correction sends bourse into panic
by rehab el- bakry
after two years of defying gravity, the egyptian capital
market got the wind knocked out of it on march 14, dropping 16 percent
amidst frantic trading before bouncing back to close down 6.5 percent
on the day. the “correction,” which took the steam out
of the bourse’s unprecedented two-year bull run, had been expected,
but its timing, acuteness and root cause caught investors off guard.
“the case had been rising so much for so long that it was only
normal for it to experience a drop because this is the way that
capital markets are,” explains securities expert khaled taha
of triple a securities. “but i don’t think that we expected
that the correction would be so abrupt and extreme.”
the cairo & alexandria stock exchanges (case) had a solid run
in 2004 and 2005, with its benchmark case 30 index growing over
140 percent annually. mid-february, however, brought a slowdown
and even a gradual dip over several weeks of nearly 20 percent,
but most analysts attributed the decline to profit-taking and believed
there was still room for growth.
the march 14 trading session began like any other. the market had
been shedding a few points here and there in recent days, but there
was no indication of an abrupt decline. within an hour of the opening
bell, however, it was clear something was wrong. by 11am, the market
had dropped 16 percent and case officials elected to intervene,
ordering a 30-minute halt to trading to stabilize the market and
give investors a chance to catch their breath. it seemed to work.
following the break, the market rebounded to close down 6.5 percent
on the day.
according to mohamed radwan, equity manager at delta securities,
the correction was purely the result of external factors. “what
happened on march 14 had nothing to do with our market,” he
says. “there have been no changes in our market that would
cause this severe [of a] correction. this had everything to do with
events that were unfolding in other markets.”
he explains that gulf investors who had fueled the boom in early
2006 suddenly found themselves constricted by overvalued stocks
back home in kuwait, dubai and saudi arabia. “they were offering
stocks for sale and no one was buying. they needed liquidity and
they needed it now,” he says. “their only option was to
cash out of the only market [in which] they knew they could offer
stocks for sale and people would buy: egypt.”
case officials have long argued that while the turnover for other
capital markets in the region might be higher, the case has higher
liquidity, allowing investors to cash out of the market more easily.
gulf investors obviously agreed.
yet what surprised many is that events unfolding in the gulf markets
could reach egypt, which is usually unaffected by that region’s
jitters even though its stocks often share the same portfolio. “we
don’t usually follow the same pattern because the behavior
of the egyptian market and economy don’t usually follow the
same pattern,” explains taha. “however, because we have
had an influx of arab investors [from the gulf] in the egyptian
market, once they had a problem in their market, it immediately
reflected on us.”
radwan agrees. he adds that this connection between the egyptian
and gulf capital markets is probably one that is here to stay. “since
gulf investors were one of the reasons why our market boomed, we
also have to accept that this is part of the risk of having foreign
investors,” he says.
one issue of contention among market analysts and participants is
the case’s decision to halt all trading for 30 minutes to allow
traders time to regroup. while the suspension of trading is not
enumerated in any country’s capital market regulations, it
is used sparingly when market officials see abrupt and inexplicable
growth or decline in share prices. a suspension of trading gives
officials time to identify the cause and formulate corrective measures.
in late february, for instance, the tokyo stock exchange halted
trading for 30 minutes after the market went haywire because of
a system glitch that caused traders to panic.
nabil moussa, executive director of hc securities, thinks case officials
made the right call when they opted to suspend trading. “the
decision to halt trading was an excellent one,” he says, explaining
that the break gave traders a chance to go “bottom fishing”
– shifting resources to fundamentally sound, reasonably priced
stocks likely to perform well under any circumstances. “once
trading resumed, people who were quick enough to think on their
feet and had the cash to spare began to look for good stocks, fundamentally
speaking, offered for a good price. that was how the market recovered.”
radwan, however, disagrees with the decision, arguing that it demonstrates
that officials are not giving the market free rein. fluctuation,
he says, is what attracts people to the stock market in the first
place. “this is the nature of the capital market,” radwan
says. “one day you’re on a high and the other the market
is changing so quickly that you can’t keep up. if we start
interfering every time something happens, then we’ve turned
capital market investment into putting your money in the bank.”
case officials never bothered to halt trading when the bourse was
reeling in rapid growth, so why should it be any different then
when the market drops a few points, wonders taha. “capital
markets have ups and downs and the best course of action is to let
them be.”
he says the correction was the first real test for many investors
and highlighted their weaknesses. when the market turned south,
inexperienced retail investors panicked and ordered their brokers
to liquidate their stocks, losing money in the process. “that’s
the problem with inexperienced retail investors who don’t understand
exactly when to buy or sell,” he says. “they usually opt
to buy stocks because someone else is buying or they sell because
everyone else is selling. they don’t have sufficient knowledge
of the fundamentals based on which to sell and buy... they should
read up on the companies and sectors before sinking their life savings
into them.”
radwan agrees, pointing out that retail investors, in general, and
novice ones in particular, make markets volatile. “that is
why we saw the market drop so much so quickly,” he says. “but
the fact that there were some who understood that this is just how
stock exchanges work, is what helped the market inch its way upwards.”
in the weeks since the correction, the case is proving to be surprisingly
robust. stocks with solid fundamentals are showing positive growth.
radwan predicts they will continue to grow, though investors will
be more wary. “i think there will be a return to stock selection
based on fundamentals such as companies’ performance, valuation
and performance growth,” he says. “there will no longer
be growth of stocks without fundamentals, and perhaps people will
be a bit more cautious in their decision-making and stock selection.”
as for the case itself, taha says the march 14 correction demonstrated
that the market is sound and with high liquidity. “this has
always been one of the targets of the case and this was our test
– we seem to have survived it.”
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