Global Financial Data has the most extensive database on historical stocks available anywhere in the world.  GFD has collected data on stocks that listed on the London Stock Exchange from the 1600s until 2018.  London was the financial center of the world until World War I, and many companies in emerging markets listed their shares on the London Stock Exchange before a stock exchange even existed in their country. After World War I, many foreign companies listed on the New York Stock Exchange.  Using data from London and New York, we can calculate stock market indices for emerging markets during the 1800s and 1900s before stocks listed on local exchanges and local emerging market indices were calculated. This is one in a series of articles about those countries.  

The Suez Canal Connects the World

There were a number of companies that listed in London and Paris as well as on the Cairo and Alexandria Stock Exchanges in the 1800s and 1900s. The first company for which GFD has data is the Bank of Egypt which traded in London from 1856 until 1910.  Several other companies came along in the 1860s including the Egyptian Commercial and Trading Co. (1863), Societe Financiere d’Egypt (1864) and the Anglo-Egyptian Banking Co. (1865-1920). However, the largest company in Egypt, the Compagnie universelle du canal maritime de Suez (Suez Canal Co.) went public in 1858 and ran the Suez Canal until it was nationalized by Egyptian President Gamal Abdel Nasser in 1956.  GFD has data on the Suez Canal from its IPO in 1862 until 1940. During the late 1800s, the Suez Canal Co. was one of the largest stocks by capitalization that traded on either the Paris or the London Stock Exchange. The Suez Canal was constructed between 1859 and 1869 and was officially opened on November 17, 1869. Dreams of building a canal between the Mediterranean and the Red Sea go back almost 4000 years, but until the 1800s, no one had succeeded in building a useable canal.  In 1856, Ferdinand Lesseps obtained a concession from Sa’id Pasha, the Khedive of Egypt and Sudan to create a company that would construct a canal open to ships from every nation. The Suez Canal Co. was founded on December 15, 1858 with the Egyptian government owning 44% of the shares, and French and Egyptian investors owning the rest. The company issued 400,000 shares at 500 francs ($100) each, giving the company a market cap of $40 million. Work on the canal began on April 25, 1859.  Both the transcontinental railroad in the United States and the Suez Canal were opened in 1869 making it easier to conduct trade around the world. Sa’id Pasha defaulted on government bonds in 1875, and he sold his 44% stake in the Suez Canal Co. to Britain which became the largest shareholders in the canal. The British invaded Egypt in 1882 to suppress the Urabi Revolt and in 1888, the Convention of Constantinople declared the canal a neutral zone under the protection of the British.  The canal was nationalized in 1956 and shareholders were paid off by 1962, though hardly at a rate that was in their favor. As Kindleberger put it, “Said and Ismail were profligate viceroys, borrowing in Europe at high interest rates for consumption, for irrigation schemes designed to serve their own estates, for an extravagant fête to celebrate the opening of the Suez Canal, for badly planned public works. The railroads and Suez Canal benefitted Europe, for example not Egypt, and cost Egypt £12 million for shares ultimately sold to the British government under Disraeli for £4 million. In all, the Egyptian government under Ismail (after 1863) borrowed £53 million, received only £32 million, paid £35 million in debt service, but still owed £52 million on capital account and arrears of interest in 1876 when the government finally defaulted. Marlowe (a nom de plume) observes that it was easy to castigate the Europeans who made every Ismail initiative contribute to their wealth, but Egyptian mismanagement was itself spectacular.” (Charles Kindleberger, A Financial history of Western Europe, London: George Allen & Unwin, 1984, p. 224) Figure 2 below shows the performance of Suez shares between 1862 and 1940. As can be seen, shares in the Suez Canal rose in price from 1858 until World War I, declined in price until the early 1920s, then made a dramatic rise until 1939 when World War II caused the price of Suez Canal Co. shares to crash back to the level of the 1920s.     The Alexandria Stock Exchange was founded in 1883 and the Cairo Stock Exchange in 1903.  The market cap of Egyptian shares that traded in London remained quite high, primarily because of the Suez Canal Co.  In 1937, the market cap of Egyptian shares exceeded $1 billion, although only about $100 million of this was from non-Suez Companies.  Figure 3 shows the performance of all Egyptian shares listed in London from 1856 until 1969.  The index peaked in 1929 and had lower highs in 1937, 1945 and 1955 right before the Suez crisis. Between 1856 and 1969, Egyptian stocks increased in price at an annual rate of 2.31% and 7.55% on a return basis, giving a dividend yield of 5.12%.  But this obscures the huge variance in returns over time. Between 1856 and 1912, Egyptian stocks rose at an annual rate of 6.83% and by 5.82% between 1846 and 1929.  Add on another 5% for dividends Egyptian stocks provided good returns during its heyday, though primarily because of the strong performance of Suez Co. shares. What does the Egyptian stock market look like if Suez is excluded from the index?  To find this out, we calculated an Egypt x/Suez index which is reproduced below.  Figure 4 shows peaks at similar times as the graph above, with the market topping out in 1929, 1937, 1945 and 1955, but the total return is completely different with the index increasing only 0.14% per annum from 1856 to 1961 and 6.37% with dividends reinvested. Between 1856 and 1929, the annual increase in the price of Egyptian stocks was only 2.00% per annum versus 5.82% once Suez stock is included.  In other words, without Suez stock, Egyptian shares behaved just like shares from any other country, fluctuating up and down, but providing little if no long-run return to shareholders.  All the return came through dividends. Egypt did calculate a stock market index of shares that listed in Cairo and Alexandria between 1948 and 1962 when Nassar nationalized a number of Egypt’s companies which is illustrated in Figure 5.  Share trading declined after 1962 and no index is available for Egypt until 1980.  

The Future of Egypt

Egypt is a unique emerging market because of the dominance of the Suez Canal Co. in the Egypt’s market cap. The Suez Canal Co. was a French company with operations in Egypt with the British owning the largest number of outstanding shares.  The Suez Canal Co. played such a prominent role in Paris that David le Blis included it as one of the stocks in their index of 40 shares that traded in Paris between 1852 and 1987. The Suez Canal Co. consistently represented over 75% of the market cap of the Egyptian stock market.  When the Egyptian government nationalized the canal in 1956 and paid it off in 1962, there were few Egyptian shares left for investors to trade in either Egypt or London. Nevertheless, during most of its history, the Suez Canal Co. provided a liquid market which generated decent returns to its shareholders. However, Egypt is still struggling politically to provide the economic foundations that will enable the country to emerge as a developed economy. Whether Egypt can overcome its political problems and become a more market-oriented economy that follows in the footsteps of Israel and creates companies that can make products that investors prize throughout the world remains to be seen.

25 years ago: January 1994

S&P 500: 481.61 (vs. 2635.96 in 01/2019) 10-year U.S. Government Bond Yield: 5.7% (vs. 2.75% in 01/2019) Gold: $377.90 (vs. $1290.70 in 01/2019) GBP/USD: 1.505 (vs. 1.2984 in 01/2019) US GDP: 7,013 billion (vs. 20,658 billion in 01/2019) US Population: 260 million (vs. 328 million in 01/2019) 01/06/1994: Nancy Kerrigan is clubbed on the knee at the U.S. Figure Skating ChampionshipsinDetroit, Michigan. 01/17/1994: Los Angeles is hit by a major earthquake that cripples vital highways. 01/24/1994: The Yugoslav Noviy (Super in 01/2019) Dinar replaced the 1994 Dinar with 1 Noviy Dinar equal to 12,000,000 1994 Dinars. Market Tops: Hong Kong, Singapore, Thailand, Switzerland, Spain Israel, Philippines, Turkey, Mexico  

50 years ago: January 1969

S&P 500: 42.54 (vs. 2635.96 in 01/2019) 10-year U.S. Government Bond Yield: 6.19% (vs. 2.75% in 01/2019) Gold: $103.01 (vs. $1290.70 in 01/2019) GBP/USD: 2.39 (vs. 1.2984 in 01/2019) US GDP: 968 billion (vs. 20,658 billion in 01/2019) US Population: 205 million (vs. 328 million in 01/2019) 01/02/1969: New York Stock Exchange initiated 4-hour trading sessions (10 A.M.-2 P.M. in 01/2019), cut out Wednesday closings in force since June 12, 1968. 01/12/1969: The New York Jets of the American Football League defeat the Baltimore Colts of the National Football League to win Super Bowl III in what is considered to be one of the greatest upsets in sports history. 01/20/1969: Richard Nixon inaugurated as President of the United States. Market Tops: Korea, Great Britain  

100 years ago: January 1919

S&P 500: 7.788 (vs. 2635.96 in 01/2019) 10-year U.S. Government Bond Yield: 4.63% (vs. 2.75% in 01/2019) Gold: $20.67 (vs. $1290.70 in 01/2019) GBP/USD: 4.75 (vs. 1.2984 in 01/2019) US GDP: 84 billion (vs. 20,658 billion in 01/2019) US Population: 104 million (vs. 328 million in 01/2019) 01/06/1919: Theodore Roosevelt dies. 01/16/1919: Eighteenth Amendment to the Constitution prohibiting liquor is approved 01/25/1919: The League of Nations is founded.  

200 years ago: January 1819

GFD US 100/S&P 500: 1.645 (vs. 2635.96 in 01/2019) 10-year U.S. Government Bond Yield: 4.67% (vs. 2.75% in 01/2019) Gold: $19.39 (vs. $1290.70 in 01/2019) GBP/USD: 4.34 (vs. 1.2984 in 01/2019) US GDP: 726.677 million (vs. 20,658 billion in 01/2019) US Population: 9.379 million (vs. 328 million in 01/2019) 01/1819: Chile, Buenos Ayres, and Colombia, de facto independent. The Six Acts sanctioned by the British legislature. Spain cedes the Floridas to the United States. New south Shetland discovered. Alabama admitted to the Union. Arkansas erected into a territory. Stamford Raffles arrives in Singapore with William Farquhar to establish a trading post for the British East India Company.  

300 years ago: January 1719

UK Government Bond Yield: 4.098% (vs. 1.34% in 01/2019) UK GDP: £80 million (vs. £535 billion in 01/2019) UK Population: 6 million (vs. 66 million in 01/2019) 01/23/1719: The Principality of Liechtenstein is created within the Holy Roman Empire. 01/03/1719: Compagnie des Indes shares hit 320 Francs and will rise to 10,000 Francs on November 21, 1719 during the Mississippi Bubble. © 2019 Global Financial Data. Please feel free to redistribute this Events-in-Time Chronology and credit Global Financial Data as the source.

Most global markets are in a bear market.  The main question everyone is asking is whether the bear market will continue in 2019 and hit new lows, or whether the stock market will find a bottom and start to move up again.  Last year, we were optimistic that markets were in a bull market, but our hopes were quickly dashed.  Many European markets hit market tops at the end of January, and the rest of the world slid into a bear market after Labor Day.  It was hoped that the September-October decline would turn around at the end of the year, but December was the worst December in the United States since 1931 as the United States slid into a bear market. The United States and the MSCI World Index had avoided a bear market in 2016 when the rest of the developed world faced 20% declines, but this time, the United States was not so lucky.  The MSCI World Index  and the EAFE Index, illustrated in Figure 1, topped out on January 26, and the S&P 500 topped out on September 21.  As the graph illustrates, the EAFE Index is at the same level it reached in 1999. The main question is how long will this bear market last?  The bear market in 2000 lasted almost three years while the 2007-2008 bear market lasted a little over a year.  We have been in the current bear market for almost a year.  Is worse to come in 2019?   The 2000-2002 bear market was actually a combination of three successive bear markets that followed each other, worsening the decline with each new event.  First, the internet bubble burst in 2000, then in 2001, the 9/11 terrorist attacks further devastated the market, and in 2002, the collapse of Enron and other companies led to the passage of the Sarbanes-Oxley Act which tried to redress problems with corporate filings.  Although the 2008 decline was driven primarily by the unwinding of the real estate bubble that had built up in the United States and other countries, it took the collapse of several banks and investment companies, such as Washington Mutual, Lehman Brothers and Merrill Lynch to spur the government into action, passing the TARP to prevent the rot from spreading further through the financial system.  

GFD’s Alternative Indices

To analyze the current bear market, we would like to use two of GFD’s Alternative Indices that are provided exclusively by GFD to its customers.  The first compares the number of market tops and market bottoms each year while the second looks at changes in the number of shares outstanding. In both cases, we have 100 years of data to analyze these indicators over several market cycles. Global Financial Data covers 100 stock markets to determine which ones have hit a market top and which ones have hit a market bottom in the past.  GFD defines a bear market as a 20% decline in the primary market index for each country and a bull market as a 50% increase in the primary market index.  A market top occurs when the index declines by 20% or more after a 50% increase, and a market bottom occurs when the market rises by 50% after a 20% decline.  Bear markets occur more quickly than bull markets and over a shorter period of time with higher daily volatility, so their occurrence is quickly noted.  However, it may take a couple of years for a market to make the 50% recovery for a bull market to occur and it is only then that analysts realize when the market bottom occurred.  If the December lows have not been breached by this summer, then we will know that the current bear market is over with, but any penetration of the December lows over the next year sould signal a continuation of the current bear market. Although the United States stock market attained all-time highs in 2018, riding on the back of the tremendous growth in the FANG stocks, the MSCI EAFE index, MSCI Europe and MSCI Emerging Markets as well as China, France and other countries never exceeded their 2007 highs.  The bull market of the past eleven years has been mostly an American phenomenon.  66 markets hit tops in 2007 and 66 markets hit bottoms in 2009, but the recovery since then has varied dramatically from one country to another. Will the current bear market be like 2000-2003 when successive events drove the market further down, or like 2007-2008 when the market responded to a single event, the real estate collapse? There are many reasons to believe that the current bear market could continue in 2019.  Fears over rising interst rates, a trade war between China and the United States, Brexit, the rise of the “yellow jackets” in France, the rise of populist leaders in Italy, Mexico and Brazil and dozens of other events could easily tip global stock markets to new lows. On the positive side, emerging markets did not participate in the December decline that devastated American markets. The MSCI Emerging Market index failed to break its October 30 low in December. Moreover, a look at Figure 2, which nets market bottoms against market tops shows that the market has had three successive years in which market tops have exceeded market bottoms.  The last times this happened were in 1991-1993 and in 2001-2003. Of course, three years in a row doesn’t prevent the market from hitting a fourth year since the indicator hit four consecutive years of market tops exceeding market bottoms in 1965-1968 and five years in 1974-1978. Nevertheless, since this has only occurred twice in the past 100 years, the probability of a fourth year of market tops exceeding the number of market bottoms seems low.  A turnaround sometime in 2019 seems likely.   Let’s look at another of GFD’s exclusive alternative indicators.  The World Share Value Index is illustrated in Figure 3 below.  GFD calculates Share Value Indices for all the major markets in the world.  They take the market capitalization of each country and divide that by changes in the primary price index for each country.  The difference measures the growth in the number of shares outstanding over time.  As the graph below illustrates, there was little growth in the number of shares outstanding in the 1980s, but some growth in the 1990s and dramatic growth in the 2000s.  Each of these was followed by a 50% decline in the markets. A similar decline occurred after the growth in the number of shares outstanding between 1960 and 1973.  During the current market cycle, the indicator has barely changed.  There was virtually no growth in the number of shares outstanding throughout the world between 2008 and 2018.  This would tend to indicate that the decline in the market in 2018-2019 should be more modest than it was in 2000-2003 and 2007-2008.  

Conclusion

Of course, if we knew where the market was headed in 2019, we would be investing wisely and keeping this information to ourselves, but based upon the fact that the market top began a year ago in January, that the increase in the number of shares outstanding during the current market cycle has been small, and that Emerging Markets are already starting to bottom out, it seems likely that the market is more likely to hit new market bottoms in 2019 and then move into a new bull market, than enter a multi-year bear market as occurred in 2000-2003. We still feel that at some point in 2019, new attempts at breaking the December lows will occur, but once that occurs, stocks will begin a new bull market into 2020.  If you want to know if we are right, check back in a year.

Global Financial Data has added Share Value Indices for over 90 global markets with over a century of data for major countries.  Share value indices allow analysts to determine how the number of shares outstanding has changed over time in order that they can differentiate between changes in price as a source of changes in market capitalization and changes in the number of shares outstanding in market capitalization. Market capitalization is calculated by multiplying the price of shares by the number of shares outstanding.  The number of shares outstanding can increase as a result of a company raising capital by issuing new shares to the public, or by issuing new shares in order to take over a company that was previously private.  Companies that do an initial public offering and sell these shares to the public also increase the number of shares outstanding. The share value index would NOT change if there were a stock split or stock dividend since this would have no impact on the market capitalization of the company.  If one publicly traded company bought out another publicly traded company, no change in the share value index would occur since the shares would simply be transferred from one company to  the other. The share value index would decrease in value if a company went private, removing their shares from the public’s hands, if a company were nationalized by the government, or if the company purchased its outstanding shares, reducing the number of shares in the hand of the public. The share value index is calculated by taking the value of shares outstanding and dividing this by the value of that index.  If the stock market index and the market capitalization double in price, there would be no change in the Share Value Index.  

Share Value Index and Stock Market Index Changes in the 1980s and 1990s

A good example of how the Share Value Index can explain changes in the stock market is illustrated by the dramatic change in the global stock market in the 1980s.  The graph below measures global stock market capitalization as a share of GDP from 1900 to 2018. As Figure 1 illustrates, there was very little change in the ratio of global stock market capitalization to GDP between 1900 and 1980.  From 1980 to 2000, there was dramatic growth in the ratio, peaking in 1999. This was literally a once-in-a-century change in the stock market.  What caused it?  Was it because companies issued more shares to the public, or was it because of a dramatic increase in the price of stocks? Investors wanted to pay more for stocks in the 1980s and were willing to receive a higher proportion of their return in capital gains than in dividends.  The dramatic decrease in personal tax rates under the Reagan administration encouraged the shift from dividends to capital gains.  Figure 4 shows the world dividend yield between 1925 and 2018. The yield had averaged between 3% and 6% between 1925 and 1982 with 4.5% the average yield.  Between 1980 and 2000, the dividend yield moved down steadily and today it averages around 2%, about half of the level between 1925 and 1980. It should be remembered that since 1981, yields on government bonds have dropped throughout the world.  During the past few months, markets have edged into a bear market as interest rates on U.S. Government bonds pushed above 3%, levels that would have led to a bull market 20 years ago. So what changed investors’ perceptions of risk and their valuation models of the market? The 1980s and 1990s saw the world move from the closed financial markets that had prevailed in the world between the Great Reversal of 1914 and the 1970s and into a Globalized world that had prevailed before World War I undid the globalization of the 1800s.  If you combine this with lower yields on government bonds, the privatization of nationalized corporations, the growth in stock markets in former Communist countries, lower interest rates and lower tax rates, you have a once-in-a-lifetime shift in global financial markets. It may be fears of a second Great Reversal, in which governments reject globalization in favor of global competition through political intervention that has driven markets down during the past few months.  Unfortunately, if this is the case, a drop back to the levels of 2000 and 2008 remains a possibility. Let us hope that global leaders can see the folly of their actions and reverse course before it is too late.