Globe stockbrokers confident market will recover

by David Kelleher

Market sentiment, which has been going through a rather negative period, is due to a number of factors, not least the fact that many investors expect companies to perform well as soon as they are listed on the Stock Exchange.
Globe Financial Stockbrokers Ltd’s Capital Market Survey report states that this could be one reason why investor confidence has been dampened over the past months.
It adds that investors have not realised that all listed companies have medium- to long-term goals and that investments made during the Initial Public Offering (IPO) or share issue of any company must be made with a full understanding of the underlying risks and objectives of those companies.
The report further says that investor liquidity may have also contributed to the decline. The introduction of new taxes may have caused expenditure trends to change considerably, allowing for fewer consumer savings.
“The lack of investor education may have played a pivotal role. The Malta Stock Exchange and Maltese stockbrokers have tried to educate the public, but there is much more to be done in this respect,” the report says.
Taking a more general look at the market pre-2000 and during last year, the capital market survey said that the exuberant bull market, which began in the latter part of 1999, was largely brought about by the acquisition of Mid-Med Bank by HSBC in June of that year.
“However, this acquisition served to highlight the undervalued nature of other companies quoted on the Malta Stock Exchange, some of which were quoted since the early 1990s. The increase in account holders with the Malta Stock Exchange, and the higher turnover volumes and transaction levels, after June 1999, show that the general public, prior to that date, was uninterested in the stock market.”
“The year 1999 was characterised by a substantial turnaround in the culture of investment. The sale of Mid-Med Bank helped towards this, as did the number of investment funds that came onto the market, particularly La Valette Funds SICAV plc, Vilhena Funds SICAV plc, Global Funds SICAV plc and Tri-Med Accumulator Fund SICAV plc. The acquisition of Mid-Med Bank served to ignite the sentiment of the market.”
During the first quarter of 2000, market sentiment was further enhanced by the strong involvement of two investment funds that are specifically geared towards benefits to be derived from the privatisation of state-owned entities: the Privatisation & Equity Fund and the Wignacourt Fund. These supported the market by investing more than Lm20 million, and so maintained the momentum.
The report says that the evaporation of the euphoric bull market began in April 2000. This was in line with the downturn in the international markets, lead by stocks in technology, media and telecommunications (TMT). Until then, the markets had rallied on the back of the US’s 10-year economic growth. Maltacom plc’s share price on the London Stock Exchange suffered because of this international sentiment. Indirectly, this factor contributed towards the trend in Malta.
“The fact that no state-owned entities were privatised during 2000 may have also contributed to the slowdown in activity on the Malta Stock Exchange. It may have dampened market sentiment, which was (and remains) eager to invest in some of these entities.”
The introduction of taxes on Maltese and international collective investment schemes caused investors to shy away from the market in early 2001. This tax, indirectly, may have also communicated the inadvertent message of a possible introduction of capital gains tax on transactions at the Malta Stock Exchange. Either way, investments by the public in Maltese collective investment schemes took a downturn, and there were also substantial redemptions.
As a result, investment funds retired their support in the market. Without this support, and with the market suffering from general uncertainty because of the international and Maltese macro-economic slowdown, those investors sitting on gains made from earlier investments flocked to sell their holdings, even at prices that were unfavourable to sellers.
Another factor that may have contributed to the current bear market was the government’s decision, as shareholder in Middle Sea Insurance plc, to dispose of – at the price of Lm2.281, when the price quoted on the Stock exchange was around Lm4 – the shares it had acquired during the HSBC takeover of Mid-Med Bank.
Market capitalisation stood at Lm1.2 billion as at 31 May this year. Compared with the figure for 1999, this shows a decline of Lm1.6 billion. Financial performance announcements by the larger market-capitalised companies have not helped. In particular, the financial sector companies reported lower profits in 2000 than those for the previous year. The performance of these companies was hindered not by their core operating activities during 2000, but by the extraordinary gains made on their portfolio of securities during 1999. Because of the performance of the Maltese and international stock markets, these profits were not repeated in 2000.
Finally, the TWAMP (Trade Weighted Average Moving Price) may have played an indirect role in what is happening today. Its introduction was geared towards avoiding having small transactions drastically affect the share price. However, it has had a detrimental effect, in that it creates long periods of decline in share prices, and similar long periods of recovery. It has contributed to the decline in market sentiment. The recent 25-day decline recurrence, without TWAMP, may not have taken so long.
That said, Globe Financial Stockbrokers are confident of a market recovery, and feel the need to remind investors that trends in all stock markets are inevitably cyclical.