As the third quarter of the year comes to a close, the local equity market is heading for a slight decline during the summer months. While the third quarter was off to a strong start on the Malta Stock Exchange with the Index for local share prices registering a five per cent rise in July, these gains withered away during the ensuing two months on substantially reduced trading activity. In fact, trading volumes in September amount to only €1.7 million – the lowest monthly volume in the past 12 months.
The downward trend in equities listed on the Malta Stock Exchange during the summer contrasts with developments in global stockmarkets. While the local equity market was flat during the past three months, double digit gains were registered in most of the major stockmarkets.
In the US, the S&P 500 Index is on track for its best month in almost a decade. This benchmark Index is so far up 9.37 per cent in September, just below the best month for the Index in the past decade since a rise of 9.7 per cent in March 2000 at the height of the technology boom. While September is generally a weak month for equity markets, the gains registered in the past few weeks would place this month’s performance as the best September since 1939, when share prices in general rose 16.5 per cent.
The strong gains witnessed in September mainly reflected hopes that the US economy would avoid a double-dip recession. Market observers are anticipating that the Fed’s promise of further “monetisation” of its balance sheet – known as “quantitative easing” – would lend whatever support the economy needed to avoid a double-dip recession.
As the Federal Reserve announced its willingness to further ease monetary policy, the dollar suffered a renewed decline against the euro and other major currencies. On September 24 the euro climbed to a five-month high against the greenback at a level of $1.3495.
In Europe, the main equity markets also rallied sharply during the summer months. The FTSE 100 is up 6.76 per cent in September alone and 13.46 per cent per cent in Q3. Likewise, in September, Germany’s DAX registered gains of 5.92 per cent with the French CAC 40 rising by 7.78 per cent. The focus on the growing indebtedness on some of the members of the eurozone and the cost of refinancing this indebtedness somewhat dampened overall sentiment in Europe. On the other hand the increase in the German business confidence to the highest level in more than three years boosted European equity markets.
The precarious state of Government finances in the periphery euro member states of Greece, Ireland, Portugal and Spain led to costs to protect the bonds of Europe’s most-indebted nations. Investors demand ever-higher interest rates to purchase bonds of some of the region’s most indebted nations. The difference in yield, or spread, between Portuguese 10-year bonds and German bonds widened to a record 420 basis points earlier last week.
Last week was an important week for these eurozone members as Ireland, Spain, Greece and Portugal managed to sell its sovereign debt in new primary market offerings. On September 21 Ireland sold €1.5 billion in a bond auction and Spain sold €7 billion of 12-month and 18-month Treasury Bills. Moreover, Greece sold €390 million of 13-week Treasury Bills at a yield of 3.98 per cent.
Despite a continuous concern on the ability of these countries to reduce their burgeoning budget deficits, there was a general improvement in investor sentiment across the global market. An increased appetite for “riskier” assets was also evident across the Middle East where share prices in Dubai also rose to the highest in four months after the Emirate’s government was said to be planning a USD1 billion bond sale boosting investor confidence.
Notwithstanding the general improved appetite towards riskier assets, a current theme being focused upon across international equity markets (and which is also a feature in the local stockmarket) is investing in a portfolio of equities with high dividend yields. These are normally regarded as defensive investments and despite the strong market rally across international markets, such equities also climbed as they offer superior returns to bonds. Some international commentators advocating this strategy explain that the promises by the Federal Reserve to keep monetary policy relaxed will keep interest yields low, making the returns on dividends from equities more attractive compared to yields on government paper as well as corporate bonds in some instances.
In Europe, average dividend yields stand at around four per cent, more than 1.5 percentage points above benchmark 10-year government bonds. Applying this to the domestic market, one finds that the top dividend yielding companies namely GO plc, Plaza Centres plc, MaltaPost plc, Bank of Valletta plc and Malta International Airport plc offer net dividend yields (after deduction of 35 per cent tax at source) ranging between 3.80 per cent per annum and 5.41 per cent per annum. This also compares favourably to the 10-year MGS yield of 3.19 per cent per annum net of 15 per cent final withholding tax.
Although all these companies seem to be in an excellent position to maintain and in some instances also offer even higher dividends going forward, they have so far failed to attract investors during recent months. The trading activity in all these equities has fallen in recent weeks on general lack of interest in the market. Yet, the appetite for corporate bonds remains high.
So what is happening on the Malta Stock Exchange? Why have volumes decreased so rapidly and why has the local market underperformed global equity markets to such a substantial degree in September? Why is the overall trend in the local equity market moving in contrast to the upswing in international shares and companies listed on the Malta Stock Exchange offering bond-like income without any major response by the investing public? Are local market participants failing to disseminate the right level of information to their clients?
Are Maltese investors increasing their exposure to international equities at the expense of a reduction in local equities? This is very probable as evidenced by the sharp decline in local market activity in recent weeks. Furthermore, this could also be as a result of the ease with which one can move in and out of international equities whereas the opposite is the case with local equities. This contrasts sharply with the situation in the Malta Government Stock Market where investors have the possibility of buying and selling on a daily basis even in large quantities.
The daily high volumes traded in Malta Government Stocks clearly indicate that where “market makers” operate markets become more liquid and investors respond positively to this by trading frequently. There is a strong case for the introduction of “market makers” also in the local corporate bond and equity markets without any further delay.
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.
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Mr Rizzo is director of Rizzo, Farrugia & Co. (Stockbrokers) Ltd.