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Necessary risk
I think I’m one of the stock market’s few
long-term investors. I bought a handful of mu-tual fund shares in
September 1996, when the market had just got moving, and another
handful in January 1997, just before it peaked. After two and a
half years of buying, holding and reinvesting dividends, I think
I’m about even.
Unfortunately, being even is just like losing. Not only has the
value of my original investment fallen by about 5 percent a year
due to inflation, but I’ve missed out on the 9 percent a year
I could have made by parking the same money in a bank. So I have
something of a personal interest in figuring out why Egypt’s
stock market has perfor-med so poorly over the past three years.
To be sure, the Egyptian market has suffered a number of shocks
during its short life, and each has hurt share prices. But when
Asia recovers from the Asian crisis faster than Egypt does, it’s
time to look elsewhere for answers.
You would think that with 5 percent growth, minimal inflation and
debt, a stable currency, and geographic centrality, Egypt would
enjoy quick rebounds. Yet somehow the market never recovers from
shocks as quickly and as thoroughly as it should.
I think the problem is philosophical. Throughout its reform program,
Egypt has emphasized caution. This economy, officials say, will
not turn out like Russia’s. To achieve that reasonable goal,
policymakers have adopted a number of less reasonable restraints
that have kept the economy and its components from reflecting market
pres-sure. These measures have limited the downside, but they’ve
also choked off the upside. It’s time they were reconsidered.
One example is the 5 percent daily limit on share price movements.
This limit, like circuit breakers in other markets, prevents news
from triggering a selling panic or buying frenzy that could destabilize
the market. But Egypt’s tripwire is too low.
When bad news hits other markets, share prices fall until the point
when bargain hunters see them as underpriced, at which point the
rebound gets under way. In Egypt, however, the sell impulse is never
allowed to purge itself, so the bargain hunters never get the chance
to spark rallies. Instead, selling pressure is dragged out over
weeks of steady but slim decline, creating the enduring malaise
that we see today.
The 5 percent limit also exacerbates the market’s worst quality
– illiquidity. Share-holders who can’t find buyers at
5 percent down but who are willing to accept a loss of 10 percent
aren’t allowed to trade, hence they have no exit. And without
exits, many investors won’t enter.
The unfortunate fact is that Egypt will never enjoy high rates of
growth or a rising stock market until it is willing to tolerate
economic contractions and falling share prices. There is no separating
risk and re-turn. Markets are either controlled, in which case they
sink slowly and surely toward a crisis, or they are freed, in which
case some rise and some fall. The choice is between mobility and
stagnation, and Egypt has chosen stagnation when its economy is
uniquely prepared for risk-taking.
Eventually, Egypt will have to take its new economy out for a spin.
It could start by abolishing the 5 percent trading limit. The twist
is that capital market officials appeared ready to lift the cap
in early 1998 before complaints from the investment community stopped
them. The professionals, it seems, had so little confidence in the
market that they were unwilling to give up their downside protection.
Now that I think about it, maybe that’s the problem with the
market, after all.
ANDREW DOWELL
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