When the US sneezes the whole world catches a cold. It may be a cliché but it is true, and this time the US is doing more than just sneeze as first one and then another of its leading financial institutions go to the wall.
News of the collapse of Lehman Brothers, the buy-out of Merrill Lynch by Bank of America and a rescue plan for the world's largest insurer, AIG, has sent markets into panic. Even small individual investors, who might never have heard of the three giants, have shouldered heavy losses.
Egypt has not escaped the sting. The already depressed stock exchange lost almost 10 per cent in two days, closing on Tuesday at 7,184.35 points, its lowest since March 2007. Limited gains realised early on Wednesday, before Al-Ahram Weekly went to press, were attributed to news of deals by EFG-Hermes and Orascom Construction Industries. The CASE30 Index jumped 3.28 per cent, adding LE1.1 billion in trading value, but this was still insufficient to offset the selling spree.
"Across the board, everything was down," says Mohamed Radwan, head of foreign sales at Pharos Securities. "Foreign institutions were liquidating their shares in the local market to make up for losses back home, and panic selling by individual investors added more pressure on the market."
Blue chips, including heavyweights like Orascom Telecom (OT), Orascom Construction Industries (OCI), and Commercial International Bank, the focus of much foreign investment, were hardest hit.
"The problem is that shares like OT and OCI comprise almost 50 per cent of the CASE30 Index. Pressure on these companies weighs down the market as a whole," says Mohamed Abu Basha, economist at EFG-Hermes.
A majority of blue chips are also traded as GDRs, making them vulnerable to the crisis in international financial markets.
Sherif El-Seweifi, head of technical analysis at investment bank Delta Rasmala, believes the local market has overreacted to the crisis. "If the Dow Jones index, which is closely tied to the American economy, lost only four per cent why would the local market lose 10," he asks.
"In times of distress markets are very sensitive to bad news," he says in an attempt to account for what he sees as the unjustifiably bearish sentiment that has afflicted local investors. "In fact any news can be perceived as bad news."
The international financial crisis has compounded the local market's five-month decline. The nose dive began in May with the government's introduction of a package of policies that were read by some as a retreat from its earlier investor-friendly stand and which sparked a selling spree. The gloomy picture worsened when Moody's, and more recently Morgan Stanley, downgraded their outlook for the local economy, citing inflationary pressure, a move that negatively impacts on Egypt as an investment destination for both portfolios and FDIs.
Shares were not the only victim of shaken confidence. The Egyptian pound fell to LE5.45 against the dollar on Wednesday, its lowest level in five months. Barely a month ago it was trading at LE5.29. The fall in the value of the pound came as foreign investors pulled out of the market, converting locally denominated investments into dollars.
"This is happening in emerging markets across the MENA region, and even in Russia and Turkey, as investment funds attempt to minimise their exposure in equity markets," says Radwan.
Analysts expect market volatility to continue, with little chance of a bounce back any time soon.
"The outlook for emerging markets in general is not positive. Inflation rates are high and governments have pushed up interest rates which cannot help but have a negative effect on investment," says Abu Basha.
Inflation reached 25.6 per cent in August, the highest level for 16 years. The Central Bank of Egypt has raised overnight rates on deposits and loans five times this year in an attempt to contain inflationary pressures. It is expected to introduce another rise today right after the Monetary Policy Committee meeting.
"The more negative news we receive," says El Seweifi, "the closer we move towards a key reversal day when the bottom is reached and the only way is up."
It is a prognosis unlikely to reassure investors, and all three analysts agree that a recovery is unlikely in the next six to 12 months. The great fear is that the financial crisis in the US, which has already contaminated international markets, will exacerbate the global slowdown.
"We are facing an unprecedented financial crisis," IMF chief Dominique Strauss-Kahn told AFP on Monday. It stems from "the heart of the system", the United States, not from its "periphery", and has affected the whole world simultaneously.
"Some parts of the world are more or less affected, but the slowdown is general. The entire global economy will slow down by between 0.5 and two per cent," including China and Europe.
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