The Malta Stock Exchange (MSE) is celebrating its 25th anniversary this year and since inception, the local market has very often been described as being illiquid. Although as time passed by participation by investors increased considerably, some investors (both retail as well as institutional) preferred to invest in overseas markets due to the difficulties in entering and exiting the local market when compared to the more developed stock markets across Europe and the US.
One of the main reasons for the relative illiquidity of the local market is the lack of market makers across equities and corporate bonds. Despite efforts in introducing legislation to this effect some years ago, this initiative failed to take off and continues to impinge on the liquidity aspect of the market.
On the other hand, the Central Bank of Malta is the market maker for sovereign bonds or Malta government stocks which enhances liquidity for investors wishing to exit their positions. Unfortunately, the Central Bank is only willing to supply the market in very few securities on a daily basis and in limited quantities. This restrained participation also somewhat affects the trading activity aspect of the Maltese sovereign bond market.
Despite these restrictions, is it still fair to describe the Maltese market as being illiquid? Or has the depth of the market improved over the years? This article aims to shed light on the characteristics of the Maltese equity, corporate bond and sovereign markets and how trading patterns changed over the recent past.
Trading activity across the Malta Stock Exchange during the first three months of 2016 was characterised by a wide divergence between the various asset classes.
Notwithstanding, the lack of market makers across the equity market, trading activity during the first quarter of this year hit a 10-year high. On the other hand, trading volumes across the corporate bond market and MGS market declined significantly from the high activity registered during the first three months of 2015.
The surge in volumes across the equity market to €26 million may seem odd at the outset. However, one of the major factors that led to this was the record low interest rate scenario. It has been well documented across international financial journals that at times of very low and indeed negative interest rates, investors shift their attention to the equity market in search of improved returns, either in the form of dividend income or via companies that may seem to have prospects for capital growth.
While equity market volumes increased, trading activity across the corporate bond market declined by 40 per cent to €11.9 million. It is worth highlighting that the comparative period (i.e the first three months of 2015) was one of the most active for the corporate bond market. In fact, the volumes across the corporate bond market in the first quarter of 2015 of €19.6 million were just shy of the record in the history of the MSE which was reached during the third quarter of 2015. As such, the decline in the first quarter of 2016 must be analysed in this context.
The growth in volumes over the past two years is again a very strong indication of the amount of investible funds chasing superior returns when compared to the sharp decline in yields across the sovereign bond market as well as from traditional bank deposits. However, the decline in activity during the past three months and also during the final quarter of 2015 at €9.4 million shows the lack of availability of bonds on offer, mainly due to the ‘buy to hold’ mentality which still dominates the dynamics of the Maltese retail investing public.
As such, while it may be true that the local corporate bond market could be described as being illiquid for entering since there are not many bonds available for sale on the secondary market, the same cannot be said for an investor who wishes to exit the market.
The debate across financial circles should again revolve around the requirements to introduce market makers in the equity and corporate bond markets
Assuming normal market conditions and a company devoid of any credit risk issues (of a financial or a strategic nature), it would be rather easy and quick for an investor to dispose of one’s position even if it woud be of an institutional size and hence larger than average volumes are seen on a day-to-day basis.
Trading activity in MGS during the first quarter of 2016 of €101.9 million follows from another weak quarter during the last three months of 2015 at €74.2 million. Previously, volumes across the MGS market had not fallen below €100 million since Q4 2011.
Moreover, the activity across the MGS market during the first quarter of 2016 was also less than half the quarterly average traded in 2014 when a record value of €836.4 million worth of Malta government stocks changed hands during the course of that year. Indeed, trading activity across the MGS market during Q1 2016, represents a decline of 70 per cent from the record activity of €311.5 million during Q1 2015 at the time of the announcement by the European Central Bank of its quantitative easing programme and the subsequent sharp decline in yields as well as corresponding upswing in MGS prices.
In fact, the first three months of 2015 can easily be described as the most hectic for the Maltese sovereign bond market. The decline in volumes since the record level in Q1 2015 must also be seen in the context of the introduction of the QE programme across the eurozone, including Malta, as from March 2015.
Statistics published by the ECB on a monthly basis reveal the amount being purchased by the QE desk conducted by the Central Bank of Malta on behalf of the ECB. In fact, a substantial amount of activity which previously used to take place on the regular market is now being done through over-the-counter transactions (OTC’s) with the QE desk.
Between March and December 2015, the QE desk purchased a total of €282 million worth of MGS and an additional €81 million worth of MGS during the first two months of 2016 – effectively reducing the supply of MGS available for trading on the regular market in a substantial manner.
Moreover, given the increase in the QE programme announced by the ECB earlier this month, the amount of repurchases by the QE desk at the Central Bank of Malta should be increasing as from April 2016 onwards.
This scenario was also confirmed by the governor of the Central Bank of Malta in the latest Quarterly Review. The governor stated: “Given the limited depth of our capital market, the APP [Asset Purchase Programme] has somewhat tightened investment options for the Maltese investor.”
Although in recent months the MSE has been seeking ways of improving the availability of investment options for the investing public, most notably via the introduction of a junior exchange-regulated market called Prospects, increased priority needs to be given again to some of the basic concepts which may have been put on the back burner.
As such, the debate across financial circles should again revolve around the requirements to introduce market makers in the equity and corporate bond markets. The MSE and members of the MSE should do their utmost to encourage additional mature companies to seek a listing on the Official List of the MSE to increase the options available to the growing investor participation in Malta. A deeper and larger stock market is a key ingredient for the continued success of the Maltese economy in an increasingly regulated environment.
This was also recommended by the governor of the Central Bank of Malta who opined that in the context of the QE programme, “we need to diversify our capital market further, with securities that are sufficiently backed by assets, such that the integrity of our capital market and the stability of our investors’ base remain intact”.
This is an important phenomenon that needs to be given utmost importance given the fact that the monetary stimulus measures by the ECB are likely to persist for a prolonged period.
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 company/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, and may also have other business relationships with the company/s. 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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Edward Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd.