Speculation, "margin" behind violent decline of EGX: experts

CAIRO – 23 March 2021: The Egyptian Exchange (EGX) witnessed a violent decline during mid-week session, after witnessing 30 minute-halt of trading on EGX100. Financial market experts attributed the main reasons for this decline to speculation on some shares of the EGX 70 index, and the increase in "margin" operations, which were greatly affected by the decline in the stock market.

The margin system allows the customer to buy a security by paying a part of its value in cash, while the rest is paid by a loan from the brokerage company which he deals with, with the guarantee of the securities subject of the deal, and a large number of dealers turned to this system in light of the great decline in liquidity, which prompted the use of the margin purchase mechanism or what is known as "margin", to finance their trading in the market.

Vice Chairman of the Board of Directors of Horizon Securities, Mutasim Al-Shahidi, said that selling pressures on small and medium-sized stocks plunged the EGX 70 index to significant levels of decline, followed by a drop in the EGX 100 by more than 5%, which forced the suspension of the trading session, adding that the selling pressures resulted of two factors; First, investors’ fear of the existing margin call operations.

The second is their fear that the valuations of some stocks will be less than the market value, according to Al-Shahidi.

While Chairman of the Three Way Securities Brokerage, Rania Yaqoub, affirmed that there are no economic or political reasons behind the huge decline of the Egyptian Exchange indices during the session, referring to the main reason for the decline, which is "margin"; Because the successive decline of stock market indices over the past few days has led to an imbalance in the margin buying ratios for clients, especially since there are many clients who borrowed in higher rates than permitted, and with the violent decline of the stock exchange, the lending brokerage firms were forced to sell clients' shares to preserve their rights.

The factor behind the increase in selling on EGX is that the liquidity that entered the money market in 2020 was not aimed at investing in the medium or long term, but rather short-term investments, and this is normal because its entry to the stock exchange was linked to reassuring investors of Corona's concerns, and indeed it succeeded in rising in the money market, and individuals achieved satisfactory profit margins on speculative stocks and EGX 70 shares, she clarified. “But the usual profit taking after the rise was not taken into account, neglecting that the downward fluctuations would be violent, especially since the "margin" was used in the wrong way by the clients.”

For his part, Ahmed Mortada, director of a branch of the brokerage firm, attributed the reason for the decline to four main factors, which are: Firstly, violent speculation on some shares of the EGX 70 index, which led to an inflated market value of some securities, and no longer expresses the real value of the companies. Second, the activation of the margin call mechanism for individuals, thirdly, huge sales of a number of board members of some companies, Fourth, the absence of new stimuli in the market, the most important of which is new offerings.

Mortada suggested, to stop the bleeding of losses in the Egyptian Exchange, first, launching an index of margin ratios in the market after the great expansion of the mechanism during the past period, secondly, increasing the contribution of the Central Bank’s initiative to pump LE 20 billion into the EGX, third, incentives for companies such as reducing energy prices.

He noted that the fourth one is to place restrictions on every shareholder who owns more than 5 percent who have been purchased from the market and become a board member by specifying a period for his restriction of reducing the percentage by less than 5 percent through the open market.

During Tuesday's session, the benchmark EGX30 decreased 0.63 percent, or 65.86 points, to end at 10,471.36 points.

The equally weighted index EGX 50 dipped 3.47 percent, or 69.09 points, to end at 1,923.19 points.

The small and mid-cap index EGX 70 declined 5.10 percent, or 97.86 points, to close at 1,822.3 points, and the broader index EGX 100 lessened 3.72 percent, or 105.74 points, to close at 2,739.6 points.

Market capitalization lost around LE 7.56 billion, recording LE 633.65 billion, compared to LE 641.22 billion in Monday’s session.