The Rizzo Farrugia Malta Government Stock Index

When commenting on the performance of the Malta Stock Exchange, a commonly used term is the MSE Share Index. This is the local benchmark used for tracking the overall movement in the shares on the Official List of the Malta Stock Exchange. The main Index components currently are HSBC Bank Malta plc, Bank of Valletta plc and International Hotel Investments plc due to the size of these companies compared to the “smaller capitalised” companies such as Go plc, Malta International Airport plc and other listed companies. Therefore, movements in HSBC, BOV and IHI have a greater effect on the direction of the MSE Share Index than the movements registered by Go, MIA, Farsons and other smaller companies.

While this index provides a good way indication on the overall performance of the local equity market, there is no official index published indicating the movement in Malta Government Stocks. As much as it is important for investors to keep track of the trend in shares, it is equally important for investors to monitor the movements in the bond market especially following the volatility of international sovereign bonds over recent weeks and the strong take-up by retail investors in the recent 20-year bond issued by the Treasury.

In view of this, Rizzo Farrugia & Co have launched “The Rizzo Farrugia Malta Government Stock Index”, also referred to as the “Rizzo Farrugia MGS Index”. As the name implies this Index tracks the trend in Malta Government Stocks only and is not impacted by any changes in price movements of corporate bonds. Since not all Government Stocks trade on a daily basis, the Rizzo Farrugia MGS Index is based on the bid prices quoted by the Central Bank of Malta to provide a more meaningful trend. All MGS’s listed on the MSE are included in the Index and these are weighted by the size of the stock. So the €458.8 million of the five per cent MGS 2021 has a larger impact on the Index than the smaller issue of €52.4 million 5.2 per cent MGS 2020.

The Index is backdated to December 31, 2008 in order to measure the performance of MGS’s over the past two years. From a starting level of 1,000 points on 31 December 2008, the MGS Index read 985.33 points 1 year later, implying that the overall direction of MGS’s showed a loss of 1.5 per cent in 2009. On the other hand, during 2010, the Index edged 0.6 per cent higher to 991.64 points, but still below the level 2 years ago.

The MGS Index tracks movements in the bid prices of all Malta Government Stock issues quoted by the Central Bank and due to the inverse relationship between bond prices and yields, an increase in the Index represents a decline in yields and vice versa.

The graph of the Index clearly indicates the low of 966.17 points in June 2009 and the recent high of 1,020.21 points in August 2010 as eurozone yields dropped to their lowest levels. The steep rally from a level of 999.78 points on 27 July 2010 to 1,020.21 points on 31 August 2010 coincides with the sharp downturn in the benchmark 10-year Eurozone yield from 2.77 per cent to 2.11 per cent following Ireland’s rating downgrade by credit rating agencies Moody’s and S&P on the back of increased concern with respect to the sustainability of its spiraling sovereign debt and the possible contagion to other EU countries.

However, after rising to its recent high in the summer months, the Index has since declined by 2.8 per cent as international sovereign bond prices dropped and yields recovered strongly from their lows. There are several factors that led to this drop in bond prices (and resultant increase in yields), namely: (i) fear across markets has subsided and as a result appetite for riskier assets has increased as evidenced by the recent upturn in global equity markets; (ii) the economic outlook has improved in the US and Germany although concerns remain on the high level of unemployment in various parts of the world; and (iii) there are growing fears on the state of sovereign public finances and Germany may need to purchase increased levels of debt of the eurozone peripheral nations which are finding it increasingly difficult to borrow on the international markets.

Although risk appetite internationally increased and bond prices declined in recent weeks, demand by the local investing public for the third tranche of the 5.25 per cent MGS 2030 paper reached record levels. In fact, last month the Treasury attracted €146.45 million from retail investors for the two recent MGS offerings.

Despite the recent rise in yields, these are still very low by historic standards with the 10-year eurozone benchmark level at around the three per cent level compared to a level of over 4.50 per cent in 2007 and 2008.

The recent rally in international yields was mirrored on the local market with the Index declining by 2.8 per cent within a couple of weeks following the sharp decline in some of the longer-dated MGS prices from their recent highs. The 7.8 per cent MGS 2018 (I) suffered a drop of 992 basis points from its recent high of 133.83 per cent to 123.91 per cent. Similarly the 6.6 per cent MGS 2019 (I) tumbled by 779 basis points from a high of 124.00 per cent to 116.21 per cent and the 5.5 per cent MGS 2023 (I) dropped by 710 basis points from its recent high of 115.26 per cent to 108.16 per cent.

While the Rizzo Farrugia MGS Index has shown a minimal overall movement over the past two years, the MSE Share Index (which tracks the performance of equities) has appreciated by 7.9 per cent in 2009 and a further 4.1 per cent so far in 2010. The improved performance from the local equity market compared to the local Government Stock market over the past two years is similar to the trend seen overseas. It also very much reflects the fact that shares outperform bonds over the long-term despite their high level of volatility as was clearly evident in 2008 and 2009.

In anticipation of an increased likelihood that international bond prices will continue to decline during 2011, various international commentators are suggesting that investors should consider increasing exposure to shares of stable companies offering attractive and sustainable dividends. Despite the economic challenges which still cloud the immediate outlook for some companies, dividends that are attractive compared to bond yields and which are increasingly likely to improve as company profitability grows is being seen as a common theme for 2011. This scenario may well also apply locally.

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.

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


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