The positive start for the equity market in the early part of the year fizzled out during the past three months with the MSE Share Index moving into negative territory when the Index dropped below the December 2009 closing level on June 3, 2010. This trend is similar to that of the major international bourses which had performed strongly until the first quarter of the year but dropped heavily in May.

The local equity market had a strong start to the year climbing 11.2 per cent, however the Index closed lower in each of the past five months. Three of the four largest companies on the Borza suffered double digit losses during the second quarter of the year. International Hotel Investments plc was the worst performer with a decline of 18 per cent; Go plc lost 15 per cent of its value while the share price of HSBC Bank Malta plc shed 10.9 per cent.

Meanwhile, Bank of Valletta plc closed the quarter minimally lower as the strong interim performance to March 31, 2010 helped support the equity from the overall weakness in banking stocks. Banking equities came under further selling pressure in recent weeks after the Governor of the Central Bank of Malta warned on May 26 that local banks may need to reassess their dividend policies in view of an upward trend in non-performing loans combined with the probable introduction of more stringent capital and liquidity requirements.

The Governor made these comments in his introduction to the 2009 Financial Stability Report published by the Central Bank of Malta. Despite these warnings from the Governor, the Financial Stability Report confirmed that Malta's financial sector exhibited a high degree of resilience during the international financial crises and stress test results performed by the Central Bank reveal that local banks "are able to withstand extreme but plausible shocks". The weakness in the share prices of the two large banks was further aggravated by the increased talk at EU level on a possible introduction of a bank levy to create a fund to help prevent future bank bailouts. The increased probability of this bank levy hit banking equities hard in recent weeks with the share price of BoV losing eight per cent while HSBC suffered a 7.5 per cent decline.

Go's equity also had a very disappointing performance in recent weeks. The share price of the telecoms operator had recovered strongly from its 2009 low of €1.40. In fact, by mid-February, Go's share price had climbed to a level of €2.30 in anticipation of the full-year dividend declaration. After stablising at around the €2.12 level as the equity traded without the entitlement to the dividend, the share price lost 14.2 per cent in the past few weeks dropping to a 2010 low of €1.82.

While Go confirmed on May 6 that the Group registered growth in turnover and profitability over the comparative period last year from its operations in Malta, sentiment towards the Group may have been dented by growing concerns on Go's large investment in the Greek telecoms company Forthnet. The serious macro-economic problems in Greece did not stop Go and its major shareholder from increasing their investment in Forthnet. In fact on 30 March, Go and EIT acquired a further 4.3 million shares in Forthnet at an average price of €1.08. However, since then, the share price of the Greek company took a turn for the worse and dropped to the €0.75 level.

On the other hand, the best performing equity in the past three months was Middlesea Insurance plc with a gain of 40.2 per cent. The share price of the insurance company has been very volatile in recent months as a result of the various company announcements related to developments in Italy. After rising to €1 on 11 January, the share price dropped to €0.70 in April but following Middlesea's Interim Statement publication on May 17 claiming that the Group registered a profit before tax of €2.8 million for the first quarter of 2010, the equity quickly recovered and jumped by 50.3 per cent on fresh demand for the shares.

Another strong performer was MaltaPost plc with a gain of over 20 per cent on high volumes exceeding 1.1 million shares. The publication of the interim results on May 13 confirming the good level of profitability of the postal operator helped maintain positive investor sentiment towards the company. The share price touched a 2010 high of €0.90 shortly after the half-year results announcement and remained well supported at this level backed by the attractive gross dividend yield of 6.83 per cent per annum.

Malta International Airport plc remained the top performer for 2010 among the equities on the Official List as the five per cent gain in the second quarter helped the share price record a 37 per cent rise in the past six months. On June 2 MIA effected a two-for-one share split and this seems to have positively impacted volumes as over 114,840 shares were traded since then. Sentiment towards the airport operator remained upbeat in recent weeks especially after the announcement of the May traffic statistics on June 3, 2010 showing a 19.3 per cent increase in passenger movements during that month. In the first five months of 2010 MIA registered an increase of 7.7 per cent in passenger numbers over 2009. Last January MIA had estimated an increase of six per cent in passenger numbers for 2010.

As the overall trend in the equity market declined and trading activity remained subdued in the larger caps, the several bond issues that were launched in the past three months were mostly heavily oversubscribed confirming the continuing strong appetite from investors for fixed interest rate securities. A total of €214 million was raised by the Government of Malta, Simonds Farsons Cisk plc, Eden Finance plc, Izola Bank plc and Tumas Investments plc with a further maximum equivalent of €40 million currently on offer by Mediterranean Investments Holding plc. The MIH bonds have a distinct feature compared to the other issues this year as the company is accepting subscription in three currencies (EUR, GBP and USD) at the same rate of interest of 7.15 per cent per annum.

This feature is important following the euros rapid decline during the past three months against the US dollar and the British pound. The sovereign debt crises which gripped southern Europe (mainly Greece, Spain and Portugal) led to a nine per cent drop of the euro against the USD and 7.5 per cent against the GBP. The euro touched a four year low of $1.1942 on June 8. With many euro-based investors increasingly concerned on the future of the eurozone, the GBP and USD tranches of the MIH bond issue could prove to be popular.

While the summer season is normally characterised by mild trading volumes, analysts will focus on the interim reporting season for those companies which have a June half-year end and are therefore due to report by August. These include HSBC Bank Malta plc, International Hotel Investments plc, Go plc, Malta International Airport plc and could provide the basis for the future direction of the equity market. The primary corporate bond market is expected to be quiet with companies preparing to launch new issues after the summer "break", although the Malta Government is scheduled to issue another series of stocks in August.

Mr Rizzo is director of Rizzo, Farrugia & Co. (Stockbrokers) Ltd.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd, "RFC", is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the issuer/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.

© 2010 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.

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