Following the strong performance registered by local equities in 2013 (the MSE Share Index rallied by 14.8 per cent), the index started off the New Year with mild gains before registering two successive negative months. As such, during the first quarter of 2014 the MSE Share Index plunged by 7.1 per cent – the first negative quarter since Q1 2012.

Trading activity on the local equity market remained strong with €14.8 million worth of trades – only 1.9 per cent below the level of activity during the compar-able three months of 2013 (€15.1 million).

Although the number of positive performers (nine) exceeded the equities that declined (eight), the index still closed sharply lower. This is due to the fact that the three large caps (Bank of Valletta, HSBC Bank Malta and International Hotel Investments) all featured among the negative performers. IHI was the worst performer during the first three months with a decline of 18.7 per cent, thereby reversing the sudden upturn in the final trading sessions of 2013. The downturn in IHI’s equity is possibly due to the lack of news on the progress achieved on the sale of their apartments in London.

BOV and HSBC also registered negative performances of 8.7 per cent and 8.5 per cent respectively. BOV started off the year very posit-ively with an increase in its share price to a six-year high of €2.50 on January 21. Trading volumes were also strong, showing the high liquidity in the company’s shares. In fact, BOV’s equity accounted for 36.6 per cent of the activity that took place during Q1. The share price remained well supported at just below the €2.50 level during the first three weeks of February but started to retreat in the final week following the announcement by HSBC of its annual financial statements in which it disclosed the impact of a new banking rule introduced by the Malta Financial Services Authority on December 31, 2013. The ultimate aim of the amendment to Banking Rule 09 is to increase the level of bank reserves to partly address the recommendation made by the European Commission for Maltese banks to improve their coverage ratios and increase provisioning for non-performing loans.

BR09 now requires local banks to hold an amount of capital equi-valent to 2.5 per cent of non-performing loans less impairments and interest in suspense. However, the reserve must rise to five per cent for those non-performing loans with capital and/or interest which are past due by more than 24 months. The rule stipulates that this “reserve for general banking risks” has to be funded from planned dividend distributions and this can be built up over a three-year period.

This new regulation surprised the market and led to a sudden decline in all the banking equities. Besides BOV and HSBC, sentiment towards Lombard Bank Malta and Fimbank was also affected. Lombard’s equity ended the quarter down 8.3 per cent and Fimbank suffered a 13.6 per cent decline to $0.842. While Fimbank did not declare a dividend in view of the losses incurred during 2013, Lombard’s dividend dropped by 63.3 per cent, reflecting both the impact of BR09 and the lower profitability as a result of the higher impairments.

The other negative performers were Island Hotels Group Holdings plc (-11.1 per cent), MIDI plc (-10.3 per cent) and Crimsonwing plc (-4.8 per cent).

On the other hand, Go led the rankings of positive performers with a 9.6 per cent jump to the €2 level, possibly on speculation of the value that the company can extract from its indirect investment in Forthnet and the property portfolio in the years ahead. In fact, the equity had rallied up to a fresh multi-year high of €2.11 on February 24 but has since shed 5.2 per cent on some profit-taking following the significant upturn in recent months and on the lower dividend recommended by the directors for approval at the next annual general meeting. Meanwhile, last Friday, Go issued a very surprising announcement informing the market that it had agreed to purchase a 25 per cent shareholding in a small privately-owned Cypriot telecom provider (Cablenet Communications Systems Ltd) for €12 million. Go’s stake may increase to 45 per cent in the future. No further details were provided in the announcement and no meeting was organised with the financial community to assist analysts in assessing the benefits of this investment for Go shareholders.

New Banking Rule 09 led to a sudden decline in all banking equities

RS2 Software, Simonds Farsons Cisk and Malta International Airport all feature among the positive performers during Q1, with each equity trading up to new all-time highs. Following the 227.4 per cent surge during 2013, the equity of RS2 once again ranks among the best performers during Q1 2014. RS2’s share price advanced by a further 6.6 per cent to yet another fresh all-time high of €2.43, possibly in view of the new contract with OKQ8 as well as the collabor-ation with Fexco to enhance the functionality of their Bankworks software. RS2 will be publishing its 2013 annual financial statements on April 22.

MIA has also been a consistent positive performer in recent years. Following the 20 per cent increase in 2013 (the fourth consecutive annual increase), the equity of the airport operator advanced by a further 4.2 per cent during the first three months of 2014 to €2.25 after reaching a new all-time high of €2.28 in mid-March. This upturn reflects the record passenger results, the company’s forecast on further growth in passenger volumes in 2014, the record profitability announced for 2013 and the hike in dividends to shareholders.

Internationally, equity markets had a volatile start to the year, largely due to the recent announcement by the US Federal Reserve on timing of future interest rate hikes which could materialise much earlier than expected. On the other hand, the European Central Bank indicated that it may have to reduce interest rates further on fears of deflation. This helped support prices of eurozone sovereign bonds. Additionally, the economic slowdown in China’s economy as well as the prevailing tension between Ukraine and Russia also impacted sentiment across global financial markets.

The outlier was the Italian stock market with a double-digit positive performance whereas milder gains were registered in Spain, France and Germany. In the US, the S&P500 and the Nasdaq posted a marginal gain while the Dow Jones index eased marginally lower. The FTSE100 in the UK shed 2.2 per cent while the worst performer among the main global indices was Japan’s Nikkei with a nine per cent drop following the significant rally in 2013 (+56 per cent).

The local bond market saw the addition of one new bond during Q1. The demand for the six per cent AX Investments 2024 issue was significant, with the issue heavily over-subscribed by retail investors. Perhaps the most surprising statistic was the sheer number of applications, which exceeded 5,300. Additionally, a few days later, the Malta Treasury issued new Malta Government Stocks and the results confirmed the very high demand for fixed interest securities by local investors, as over 5,500 investors applied. The new issuance bond market should be more active in Q2 2014 as the indicative calendar published by MSE shows a €7 million issue this month and two other issues in May – one for €35 million and another for €42 million. Two existing issuers (Medserv and Island Hotels Group Holdings) have already announced their plans to approach the market.

The outlook for the equity market remains dependent on specific company developments. Investors are likely to remain more cautious on banking equities following the negative impact on dividends from Banking Rule 09. The publication of BOV’s interim results to March 31, 2014, due by end of April or early May, will be a key determinant in this respect.

Q1 was characterised by the start of the reporting season for the companies with a December year-end. The seven companies that have yet to publish their 2013 financial statements must do so by the end of April and their financial results and dividend recommendations will impact share price performances and sentiment towards these equities going forward.

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 from 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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Edward Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd.