Jordan Times
Tuesday, October 3, 2006
Amman bourse trading
sideways in bid to establish new base
Huge drop in share prices brings stocks closer to internationally
acceptable levels
By Henry T. Azzam
AMMAN — The Amman Stock Exchange has had a relatively stable summer, despite the
widening current account and budget deficits and the unstable regional
conditions (war in Lebanon and deteriorating conditions in Iraq and Palestine).
Most shares have been trading sideways after experiencing major sell-offs in
late 2005.
While the market is still vulnerable to sudden declines, it appears to be
establishing a base and a new trading range. The down risks have become
considerably lower from last year’s unsustainable levels, nevertheless, a return
of bull market conditions should not be expected anytime soon. Markets that over
shoot on the upside have a tendency to experience a longer consolidation period.
Under these unstable conditions, only nimble investors and those who are able to
successfully trade the market are likely to do well. This requires both luck to
buy at the right time, and the discipline to implement tight stop loss
strategies.
The unravelling of stock market bubbles tends to be a complex and long process.
For example, after reaching a peak of 1,527 on March 26, 2000, the S&P index of
the US stock market dropped by 47.6 per cent in the following two-and-the-half
years, instigated by the burst of the technology stock bubble. The index reached
a low of 800 on October 6, 2002 and then traded sideways, staying below the
1,000 level until the end of 2003. The US stock market has moved gradually
higher in the following three years although the S&P index is still 12 per cent
below its previous peak. It took the UK stock market more than three years to
reach a trough of 3,491 on March 3, 2003, down by around 50 per cent from the
highest level attained on January 2, 2000 of 6,930.
Today the market has not yet regained its previous peak. The correction in the
Shanghai, an index of the Chinese stock market, was swifter. It dropped 60 per
cent in 9 months from the peak attained in 2001 and stayed in a trading range
during the following four years before starting a new uptrend.
The region’s stock markets have experienced a steeper and swifter decline from
their respective peaks attained in November 2005 for Jordan, Dubai, and Kuwait
and in February 2006 for Saudi Arabia. The Amman bourse, for example, lost 40
per cent in 8 months, from the November 8, 2005 peak of 9,370 to reach or dip of
5,609 in July 2006. Since then it has been in a trading range of 5,600 to 6,500.
The index of the Dubai stock market lost 69 per cent in 8 months, hitting a low
of 393 on July 29, 2006, down from a peak of 1,274 attained on November 9, 2005.
It then assumed a trading range of 400 - 500. The Saudi Stock market, which
reached a peak of 20,966 on February 25, 2006, has been in a trading range of
10,000 to 13,000 over the past 5 months.
The huge drop in share prices over the past year did not leave Jordanian stocks
cheap or grossly undervalued but brought them closer to internationally
acceptable levels. While the MSCI index for the emerging markets is trading at a
trailing price-earning ration of 12, the corresponding ratio for Jordan is still
17. Trailing PE ratios for other Arab stock markets are either higher in the
range of 20 - 25 (e.g. Saudi Arabia and Qatar) or slightly lower in the range of
12 - 14 (Kuwait, Oman, Egypt and Bahrain).
The fact that Jordan’s stock market has not yet entered undervalued territories
and given the usual post bubble uncertainties and the reduction of global risk
appetite for emerging market assets, it is difficult to come up with a
compelling case for the return of bull market conditions to the region’s equity
markets.
That said, there are few positive developments that should help dampen any
remaining downside risks. Furthermore, easing regional tensions and a slowing
global economy could bring Brent oil prices down to the $50 a barrel range next
year. This should have a positive impact on Jordan’s current budget deficit.
With domestic interest rates pegged to the US dollar rates, peaking for the
current cycle, and given the ongoing significant investment boom in such sectors
as basic material, construction, tourism, logistics, finance, consumer services
and real estate, the private sector’s economic activities will remain firm,
growing at rates in excess of five per cent. Contrary to what happened in South
East Asia following the burst of the stock market bubble there, the financial
crisis did not unfold into a banking crisis. Banks in Jordan continue to be as
solid and prosperous as ever.
Against this background of improving macro-economic fundamentals and lingering
post bubble uncertainties, the dilemma becomes: “What to do next in this
market?” Buying shares in Union Arab Investment Company or Arab East Investment
Company after a 25 per cent rally from their respective lows is a difficult
call. Waiting on the sidelines for a further consolidation and “parking” one’s
money in bank deposits giving annual returns of 5 - 6 per cent is one option but
it will accentuate the underperformance of invested funds. Taking profits now
and waiting for the market correction to complete its course might deprive
investors from potential profits. No matter what one does, caution is advised.
As we have seen elsewhere in the world, the unravelling of stock market bubbles
could prove to be a tortuous process.
The way forward is to pick stocks with price earning ratios in the low teens and
a price to book value below 2.5, using annualised first three-quarter results.
For those who want to trade the market, the focus should be on the most liquid
stocks. This may not yield the best returns but would allow investors to exploit
trading opportunities. Timing, patience, and selectivity will be crucial for
performance in markets characterised by prolonged periods of sideways trading.
Under such market conditions, implementing stop-loss strategies is as important
as taking profits.
The writer is the founder & CEO of Amwal Invest