The equity market in pre-COVID times

Earlier this month, I published an article detailing the sharp upturn across the main international equity markets during the first quarter of this year and some readers correctly pointed out that the equity market in Malta continues to underperform the foreign indices.

The Maltese equity market has indeed been performing in a disappointing manner over recent years and I highlighted the difficulties being faced locally in some other articles published during the month of February where I also depicted the worrying downturn in trading activity ever since 2020.

Investor sentiment has evidently failed to recover from the series of shocks since the start of 2020 coinciding with the COVID-19 pandemic which dented the financial performance of most companies and led to the suspension of dividend payments to shareholders for a number of years. The invasion of Ukraine at the end of February 2022 with a resultant spike in inflation and the surge in interest rates globally in 2022 and 2023 were other major factors that heavily influenced investor sentiment coupled with Malta’s greylisting by the FATF between June 2021 and June 2022.

The market was in a very different state prior to 2020. In fact, some interesting trends emerge when looking back at movements across the Malta Stock Exchange during the 10-year period before the pandemic which many may have forgotten given the lapse of time.

In the decade prior to the pandemic between 2010 and 2019, the MSE Equity Price Index registered seven annual positive performances and moved lower in three other years. The best performance was in 2015 when the index surged by 33 per cent while the sharpest decline was in 2011 when the index dropped by 18.2 per cent. Overall, the MSE Equity Total Return Index, which includes dividends, increased by a compounded annual growth rate (CAGR) of six per cent between 2010 and 2019 despite the sharp declines registered by two of the large caps which naturally dented the overall performance of the benchmark index.

Between 2010 and 2019, the share price of Bank of Valletta plc registered a decline of 21 per cent while the share price of HSBC Bank Malta plc slumped by 50% as its market capitalisation shrunk from just over €940 million to €468 million.

On the other hand, the exceptional performances by three companies in particular is worth highlighting. The standout performer was undoubtedly RS2 plc with a share price appreciation of 1877 per cent during this period following by Simonds Farsons Cisk plc at +576 per cent and Malta International Airport plc at +475 per cent.

Given the protracted negative investor sentiment in recent years and a moribund equity market with very weak trading volumes, many market observers and investors may not recall the bullish sentiment during the decade prior to the pandemic.

In 2015, for example, when the MSE Equity Price Index rallied by 33 per cent (the best year during the decade under review), the share prices of three companies more than doubled in value and another seven companies experienced an increase in their share price of more than 50 per cent.

RS2 plc was among the best performers in six of the years (more than doubling in value in both 2013 at +227 per cent and again in 2015 at +116 per cent) but posted double-digit declines in 2010, and two consecutive declines in 2017 and 2018 before posting another spectacular return of +72 per cent in 2019. One of the main developments during the period was the entry of Barclays Bank plc as the second largest shareholder of the company in the second half of 2013 after it acquired (and still holds till today) just over 18 per cent of the company.

Simonds Farsons Cisk plc had a positive performance in nine years, with double-digit gains (in excess of 10 per cent) in six of them. The market cap of Farsons increased from only €51 million to €345 million during this decade as the profitability of the Farsons Group climbed from €3.12 million pre-tax in FY2009/10 to €12.3 million in FY2019/20.

Malta International Airport plc had a positive performance in each of the ten years, with double digit gains in six of them. Passenger traffic during this period increased from 2.9 million to 7.3 million mainly as a result of the commencement of operations by low-cost airlines which helped the profitability of the airport operator surge from €14.1 million pre-tax in 2009 to €52.6 million in 2019.

During this period, the local capital market was evidently responsive to company developments and financial performances. The spectacular performances by these three companies in particular and the declines seen in the large retail banks as profitability was under pressure largely due to the negative interest rate environment in the latter years is testament to the market efficiency at the time. More importantly, the movements in share prices took place on encouraging levels of activity with activity in the equity market averaging €85 million annually between 2015 and 2019.

The mechanics of the equity market have not changed over the years. The equity market is clearly suffering from a prolonged period of weak investor sentiment since the start of 2020. This is causing a weak flow of funds into the equity market which is one of the most important drivers of the performance of the market. In turn, the low activity over the past four years has also created an evident share overhang across various companies which is resulting in share prices of certain companies not reacting to evident progress of improved financial performances during the post-COVID recovery and the resumption of dividends by most companies.

If the market remains inefficient at reacting to company developments, then investors will not be attracted to channel money into equities. The momentum in the market is an important signal for several investors not only in Malta but across all capital markets.

It is hard to identify the catalyst that will help lift the Maltese equity market out of this dire situation. One of the key areas of intervention must be to instigate a new flow of funds into the equity market. In some of my recent articles I urged policymakers to consider a number of reforms that have taken place in various countries to help improve the flow of funds into the capital market that will inevitably help to improve investor sentiment. Incidentally, only last week, the Financial Times published an article on the success of the Swedish capital market which is driven by encouraging pension funds, retirement schemes as well as retail investors to invest in domestic securities.

There are some international success stories that Malta can easily replicate. With €25 billion in Maltese resident deposits across the local banking system, all we need is a miniscule part of this huge liquidity to be channelled, directly or indirectly via similar schemes, into the equity market to bring activity back to its pre-COVID levels. Without such new initiatives and the flow of funds into the equity market, it will be very hard to attract new entrants to the equity market and also equally difficult for existing issuers to fund their expansion via new share offerings. Policymakers need to be aware of the consequences of this moribund market.

Read more of Mr Rizzo’s insights at Rizzo Farrugia (Stockbrokers).

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