Stock markets across the world have hit new lows since the beginning of 2016, reports Sherine Abdel-Razek
It is happening all over the world. Not a single stock market has been able to escape the 2016 blues. From Wall Street in New York to Shanghai, Dubai and Cairo, red, the colour of losses, has been covering trading screen monitors.
Members of the financial community, including large investment banks like the British bank RBS, have told clients to "sell everything" except for bonds as it advises them to brace for a "cataclysmic year" and a global deflationary crisis. There are warnings that major stock markets could lost a fifth of their current values.
"It is unusual to see such turbulence at this time of the year, which is usually calm because of the holiday lull, which extends to the first ten days of the new year," said Omar Al-Shenety, managing director of Multiples Group, a private equity firm with activities in Egypt and the Gulf.
But the slowdown in the Chinese capital markets, with massive liquidity injections failing to stop it, has triggered fears that the free fall will be transferred to other international markets.
"There is a perception that the growth cycle that started in 2010 in the US is running out of steam and that the equity rally is about to come to an end. This stems from the Federal Reserve's move to increase interest rates last month, increasing borrowing costs and negatively affecting the appetite for investment," Al-Shenety added.
The fact that large US retailers like Sears and Walmart are closing many of their stores proves that such fears have grounds. The actual slowdown, as well as fears of more of the same to come, have been translated into weaker demand for oil, leading to further declines in prices to touch less than $28 per barrel earlier this week, its lowest level since 2003.
The bitter combination of low growth forecasts and the further drop in oil prices has resulted in massive sell-offs, with market observers putting losses since the beginning of the year at $6 trillion.
In the Middle East, the equity rout has added to pressure on traded shares, which have already suffered losses amid the slump in oil prices and growing tensions between Iran and the Gulf countries.
The Gulf Cooperation Council (GCC) countries are home to about 30 per cent of the world's proven oil reserves, and their governments rely on income from energy sales to fund spending.
Most Gulf bourses have already dropped steeply, with the Saudi index down 20 per cent so far this year and many fund managers saying they cannot call a bottom to these markets.
In Egypt, the EGX 30 index lost 15 per cent of its value last week, making it the worst performer among more than 90 indexes tracked globally by Bloomberg. It witnessed a rebound of three per cent on Monday in bargain hunting that traders expected to be short-lived. It gained another 2 per cent on Tuesday on news that the government is going to float stakes in public banks and companies on the stock market.
"It's panic selling. The psychological factor, the fear of catching the contagion, is dominant, especially since the market still lacks the investment tools that can hedge against unjustified sell-offs and help it to rebalance," Mohsen Adel, a market expert, told Al-Ahram Weekly.
Some local funds invest in the market out of speculation and not as long-term investors, which is why they pull out as soon as a problem appears, pushing the market over the edge, Adel added.
Lack of clarity related to the Central Bank of Egypt's (CBE) future forex policy and the devaluation of the Egyptian pound is a local contributor to the problems that have led to the massive selling, according to Ahmed Khaled, head of technical analysis at Arabiya Online.
"Investors need to know if they will be able to repatriate their profits, as the CBE has not so far revealed a concrete plan to provide dollar liquidity in the market," he said.
Minister of investment Ashraf Salman told Daily News Egypt on Monday that raising the cap on dollar deposits is unlikely in the current period as it is "not on the agenda." The CBE had earlier restricted the value of dollar deposits in Egyptian banks as a means to end the black market, but this has ended up slowing down imports of raw materials and hindering production.
A recent set of new regulations related to the banking sector has also backfired. The CBE last week lowered the ceiling on the amount that banks are allowed to lend to a single client to 15 per cent of their capital, down from the earlier 20 per cent, with the aim of limiting risks associated with lending to a small number of large clients.
It also placed new limits on retail lending, including personal, car and housing loans, and prohibited banks from extending retail loans with monthly instalments exceeding 35 per cent of the borrower's net income.
It also cut the total sum that banks can invest in money market funds from five per cent of their local currency deposits to only 2.5 per cent.
"These regulations have affected shares in the banking sector, especially those in the Commercial International Bank (CIB), which alone represents 30 per cent of the EGX30 weighting. They have also affected shares in the real estate sector which is the largest borrower from the banks," Khaled said.
Another contributor to the local meltdown is fears of the repercussions of lifting economic sanctions on Iran. "After being off the investment map for years, Iran, a huge market of 70 million consumers, is now back. It has vast investment potential, something that will affect Egypt as an investment destination in the region," Al-Shenety said.
Iran, a major oil producer, will now also start pumping more oil, which will add to the international supply and send prices further south.
In addition to the affect on the budgets of the Gulf countries, Egypt's main donors and investors during the last three years, the decline in oil prices will also likely indirectly affect investment.
"The foreign oil explorers will reconsider investing in new explorations if the price they sell their products at is getting lower," Al-Shenety noted.
Egypt attracted $6.4 billion worth of foreign direct investment in 2014-2015, the bulk of it in the oil and gas industry.
In a move aimed at containing the panic selling, the Bourse's administration updated the detailed data on listed companies with the aim of providing investors with comprehensive data to enable them to take investment decisions based on up-to-date information.
This came after unjustified massive selloffs during last week's transactions. The updated info includes the companies' profits, coupons distributed and any decisions that might affect the company's profitability and share value.
Moreover, the presidency on Tuesday said it is going to float stakes in public banks and companies on the stock market as a means to revive the market. This followed a meeting between President Abdel-Fattah Al-Sisi and ministers to discuss the stock market's decline.
The Egyptian government has stakes in the three largest commercial banks in addition to majority stakes in most of the oil industry, manufacturing sector and significant chunks in the real estate sector.
The last time state-owned companies were listed on the exchange was in 2005 when shares of Telecom Egypt, the state's landline monopoly, and oil companies Sidi Kerir Petrochemicals and AMOC were floated.
According to Reuters, there are around 270 companies listed on the bourse and about 500,000 investors, of which between 80,000 and 100,000 are active. There are 15 companies waiting to sell shares.
Khaled ruled out a rebound in prices in the short term as there is a lack of fundamental good news to pull the market out of its slump.
© Al Ahram Weekly 2016
