Egyptian economists fear markets "domino effect" (News Feature)

By Nehal el-Sherif Sep 16, 2008, 18:40 GMT

Cairo - As Egyptian shares continued to fall tumble Tuesday, analysts were expressing concern about a domino effect from the sharp fall in global markets triggered by the Lehman Brothers failure.

The Egyptian Stock Exchange Tuesday took losses on key stocks to more than 10 per cent over the past two trading sessions. The benchmark index CASE30 shed a further 4.73 per cent to reach its lowest point in 17 months, in the wake of Monday's 5.52 per cent drop.

The index of 30 key stocks on the stock exchange ended the day at 7,184 points, having plunged almost 1,500 points in the past week amid turmoil on Wall Street and other world exchanges.

The Egyptian bourse had almost doubled in value over the past four years, reaching a high of 12,000 points last May. The dramatic fall came amid fears about the health of the global banking sector.

'We have to keep in mind that stock markets worldwide are affected by one another - like a domino effect, especially emerging markets,' Rashad Abdou, a professor of economics at Cairo University, told Deutsche Presse-Agentur dpa.

Abdou said that when global markets dip, foreign investors tend to sell their shares in the Egyptian Stock Market. 'They either want to get back their earlier losses, or they sell to avoid another loss,' he said.

'When foreigners sell, Arab investors sell their shares immediately, leading to an increase in the quantity of shares supplied in the market.'

Fear after the global decline left investors in a state of panic, and Egyptian shareholders immediately followed the lead, taking the market further down.

'There is no awareness of the rules of the market among small investors. They do not know when to buy or sell, they only follow the crowd,' Abdou added.

The demise of two of Wall Street's most powerful investment banks opened a new chapter in the global credit crisis.

Lehman Brothers, the 158-year-old firm, filed for bankruptcy protection after it failed to find a buyer. Merrill Lynch, the world's largest brokerage, had fell into the arms of Bank of America for 50 billion US dollars in stock.

Mohamed al-Masry, head of the General Union of Egyptian Chambers of Commerce, agreed with Abdou.

'The global economy is expected to go through a long phase of recession, and our market will be of course affected by this,' he was quoted by the official Middle East News Agency as saying.

Al-Masry stressed the importance of being ready to face such negative effects, which he believed would not only be restricted to the stock market, but also the foreign trade and currency exchange.

Al-Masry suggested holding a committee of economists to follow the global crisis and their effect on emerging markets, including Egypt, and publish its reports.

Many economists lost the optimism they had a few month ago when the market was declining slowly, as they believed that Egypt's main index could pass 12,000 points again before the end of this year.

'If there is recession in the US, stock downtrend will take grip of the world for around a year,' Hatem el-Banna, a technical analyst at Sigma capital, told the English-Language Egyptian Mail newspaper.

'Egypt's stock will be suffering too,' he warned.