عابر سبيل
08-08-2005, 11:55 AM
أخواني الأعزاء... مقال جميل احببت وضعه لتعم الفائدة باذن الله
لآ اقصد منه تحليل ما يجري في السوق حاليا... و اترك لكل واحد استخلاص
العبر.....و بالتوفيق
How do bubbles in the stock market burst?
Sunday, August 07, 2005 Stock markets, especially in developing countries, can, and do, become some times inefficient. Fear and greed are very strong emotions and can make people do things that defy rational behaviour.Identifying a bubble is not an easy task, knowing when will it burst is practically impossible. The best one can do is to keep emotions out and stay focused on valuations and fundamentals. One of the most visible signs of a bubble is when people start coming up with all sorts of justifications as to why share prices which are already high would rise further. For example, with a trailing price earning ratio of 40, people are still buying the Arab Bank based on a rumour that the bank is going to distribute free shares to celebrate its 75 years in operation.The crowd of small investors tends to base their judgment on a view they have heard from a "knowledgeable" source. In many cases, follow-the-herd mentality prevails.A rapid rise in private sector borrowing can give advance warning of hard to spot asset price bubbles. There is enough evidence in the literature to suggest that higher volume of credit extended to the private sector, especially to the personal sector, is a leading indicator to episodes of asset price turbulence. Usually, it is with a lag of 12 months that asset price inflation normally feeds into consumer price inflation.Credit facilities extended by banks in the Gulf countries and Jordan to the private sector, which includes overdrafts, loans and advances, as well as, margin lending to buy shares, was up by 20 per cent to 40 per cent by the end of the first quarter this year compared to their level at the end of March 2004. Money Supply (MS), defined as currency in circulation plus demand and saving deposits, also surged by 16 per cent to 30 per cent in those countries during the same period.There are enough indications suggesting that the stock markets of the region have become overvalued in the past six months. Divided yields have dropped to less that 2 per cent, way below the current monthly deposit rate on the local currencies. Price earning ratios, on trailing basis (today's prices compared to earnings of the past 12 months) for Qatar, UAE, Saudi Arabia and Jordan range between 30 and 35. In developing countries, average P/E ratios are normally half that level.One rule of thumb is that fair value P/E levels are the inverse of domestic long bond yields (6 per cent on 5-year government bonds in most countries of the region) plus a 2 per cent risk premium. This translates into 18 (16 per cent + 2 per cent). Price to book value, which is the most important indicator for financial institutions, exceeds 5 for Jordan, 6 for Qatar, 7 for UAE and 8.6 for Saudi Arabia. This is way above the acceptable averages world- wide of not more than 2. Price to book exceeding 7 is considered outrageously high.While the current state of the economies of the region does suggest that growth this year will continue to be solid, one may argue that the 55 per cent to 85 per cent increases in the share price indices so far this year for Jordan, Saudi Arabia, Qatar and UAE have been excessive. The underlying profitability of many listed companies, especially from their core business activity, is nowhere close to those levels.Most bubbles are based on favourable developments, which over time get stretched to a point that is far away from reality. As prices go up, more and more people get attracted to the stock market, expecting prices to continue to rise. This means additional liquidity will be injected, further increasing share prices and creating a self-fulfilling prophecy. With time, even sceptics start to question their own judgment and decide to join the crowd fuelling additional speculation.However, as share prices become grossly overvalued, "prudent" speculators decide to cash out. This event brings strong fluctuations in share prices, and the market will starts witnessing few days of downward corrections, followed by days of upward corrections.With time people start to get fed up with the low returns on their investment and decide to exit. When increasingly more investors rush to the door, they find no one there to buy the shares from them. Trading volume would drop considerably and days of "limit down" trades become a common feature. When no one indicates willingness to buy, there will be panic in the market and brokers would start liquidating margin trades that they hold on their books. When selling at any price takes hold, the bubble would burst and the market may enter an extended period of correction.While no bubbles are identical, they tend to share common characteristics. Between November 1998 and March 2000, when the Nasdaq index of technology stocks in the US peaked, the market tripled in value. At the peak, share prices became grossly overvalued and the big portfolios started to exit. This led prices to decline by 78 per cent in the following two and the half years.The performance of the Chinese stock market is a good example of how stock markets can adjust lower even when the macro-economic environment is quite healthy.From July 1994 till June 2001, the Chinese stock market index had risen 700 per cent, propelled by china's double digit growth rates and surging corporate profitability. Valuation soared with price earning ratio reaching an average of 60 in August 2000. The market adjusted downward in the following five years, cutting price/earning ratios back to the 15 level.Excessive valuation can be adjusted either gradually through an extended period of sideway trading with a downward basis, or by a sharp correction over a relatively shorter period of time. Because the surge in prices in our markets was fuelled by lending, both directly from banks or indirectly from brokerage firms, this is likely to amplify the risks on the down side and make any downward correction longer and more severe. Investors will first lose money and then lose hope.To conclude, while it is very difficult to say with any level of confidence that the correction in the region's stock markets is inevitable. Generally bubbles continue longer than commentators expect.However, it is prudent to get out of the overvalued shares sooner than later and rebalance one's portfolio concentrating on the attractively priced stocks for long-term investment purposes. It is always advisable to sell when share prices are rising i.e., before liquidity dries out. If you base your decisions on fundamentals and choose the stocks that are properly valued, you will end up having the last laugh.The writer is the Jordan-based CEO of Jordinvest and founder and CEO of Amwal Invest©Gulf News
Article originally published by Gulf News 07-Aug-05
منقول من http://www.zawya.com/story.cfm/sid176283
لآ اقصد منه تحليل ما يجري في السوق حاليا... و اترك لكل واحد استخلاص
العبر.....و بالتوفيق
How do bubbles in the stock market burst?
Sunday, August 07, 2005 Stock markets, especially in developing countries, can, and do, become some times inefficient. Fear and greed are very strong emotions and can make people do things that defy rational behaviour.Identifying a bubble is not an easy task, knowing when will it burst is practically impossible. The best one can do is to keep emotions out and stay focused on valuations and fundamentals. One of the most visible signs of a bubble is when people start coming up with all sorts of justifications as to why share prices which are already high would rise further. For example, with a trailing price earning ratio of 40, people are still buying the Arab Bank based on a rumour that the bank is going to distribute free shares to celebrate its 75 years in operation.The crowd of small investors tends to base their judgment on a view they have heard from a "knowledgeable" source. In many cases, follow-the-herd mentality prevails.A rapid rise in private sector borrowing can give advance warning of hard to spot asset price bubbles. There is enough evidence in the literature to suggest that higher volume of credit extended to the private sector, especially to the personal sector, is a leading indicator to episodes of asset price turbulence. Usually, it is with a lag of 12 months that asset price inflation normally feeds into consumer price inflation.Credit facilities extended by banks in the Gulf countries and Jordan to the private sector, which includes overdrafts, loans and advances, as well as, margin lending to buy shares, was up by 20 per cent to 40 per cent by the end of the first quarter this year compared to their level at the end of March 2004. Money Supply (MS), defined as currency in circulation plus demand and saving deposits, also surged by 16 per cent to 30 per cent in those countries during the same period.There are enough indications suggesting that the stock markets of the region have become overvalued in the past six months. Divided yields have dropped to less that 2 per cent, way below the current monthly deposit rate on the local currencies. Price earning ratios, on trailing basis (today's prices compared to earnings of the past 12 months) for Qatar, UAE, Saudi Arabia and Jordan range between 30 and 35. In developing countries, average P/E ratios are normally half that level.One rule of thumb is that fair value P/E levels are the inverse of domestic long bond yields (6 per cent on 5-year government bonds in most countries of the region) plus a 2 per cent risk premium. This translates into 18 (16 per cent + 2 per cent). Price to book value, which is the most important indicator for financial institutions, exceeds 5 for Jordan, 6 for Qatar, 7 for UAE and 8.6 for Saudi Arabia. This is way above the acceptable averages world- wide of not more than 2. Price to book exceeding 7 is considered outrageously high.While the current state of the economies of the region does suggest that growth this year will continue to be solid, one may argue that the 55 per cent to 85 per cent increases in the share price indices so far this year for Jordan, Saudi Arabia, Qatar and UAE have been excessive. The underlying profitability of many listed companies, especially from their core business activity, is nowhere close to those levels.Most bubbles are based on favourable developments, which over time get stretched to a point that is far away from reality. As prices go up, more and more people get attracted to the stock market, expecting prices to continue to rise. This means additional liquidity will be injected, further increasing share prices and creating a self-fulfilling prophecy. With time, even sceptics start to question their own judgment and decide to join the crowd fuelling additional speculation.However, as share prices become grossly overvalued, "prudent" speculators decide to cash out. This event brings strong fluctuations in share prices, and the market will starts witnessing few days of downward corrections, followed by days of upward corrections.With time people start to get fed up with the low returns on their investment and decide to exit. When increasingly more investors rush to the door, they find no one there to buy the shares from them. Trading volume would drop considerably and days of "limit down" trades become a common feature. When no one indicates willingness to buy, there will be panic in the market and brokers would start liquidating margin trades that they hold on their books. When selling at any price takes hold, the bubble would burst and the market may enter an extended period of correction.While no bubbles are identical, they tend to share common characteristics. Between November 1998 and March 2000, when the Nasdaq index of technology stocks in the US peaked, the market tripled in value. At the peak, share prices became grossly overvalued and the big portfolios started to exit. This led prices to decline by 78 per cent in the following two and the half years.The performance of the Chinese stock market is a good example of how stock markets can adjust lower even when the macro-economic environment is quite healthy.From July 1994 till June 2001, the Chinese stock market index had risen 700 per cent, propelled by china's double digit growth rates and surging corporate profitability. Valuation soared with price earning ratio reaching an average of 60 in August 2000. The market adjusted downward in the following five years, cutting price/earning ratios back to the 15 level.Excessive valuation can be adjusted either gradually through an extended period of sideway trading with a downward basis, or by a sharp correction over a relatively shorter period of time. Because the surge in prices in our markets was fuelled by lending, both directly from banks or indirectly from brokerage firms, this is likely to amplify the risks on the down side and make any downward correction longer and more severe. Investors will first lose money and then lose hope.To conclude, while it is very difficult to say with any level of confidence that the correction in the region's stock markets is inevitable. Generally bubbles continue longer than commentators expect.However, it is prudent to get out of the overvalued shares sooner than later and rebalance one's portfolio concentrating on the attractively priced stocks for long-term investment purposes. It is always advisable to sell when share prices are rising i.e., before liquidity dries out. If you base your decisions on fundamentals and choose the stocks that are properly valued, you will end up having the last laugh.The writer is the Jordan-based CEO of Jordinvest and founder and CEO of Amwal Invest©Gulf News
Article originally published by Gulf News 07-Aug-05
منقول من http://www.zawya.com/story.cfm/sid176283