Offshore Investment Mag

* Stock Exchange not yet in harbour







The Malta Stock Exchange continues to lack breadth as well as depth. Only a handful of private companies have joined those which used to be owned fully or partially by the state. The owners brought that about by disposing of a relatively small proportion of their equity to capitalise on their track record or predicted prospects. Other companies used the exchange to raise capital through bond issues.

While the Malta Stock Exchange may have reached the threshold below which it would not be viable, it has yet to make a quantum leap above that threshold to achieve significant breadth and depth. The prevailing situation is that comparatively small deals not infrequently have a disproportionate effect on the market price of equities.

At least, thanks to a very deliberately weighted prod by the chairman of the Bank of Valletta, the puffiness that had developed in the value of the shares of a number of the listed companies has whooshed away. That, in the process, a longish bear market developed was a side issue. Better to see shares dip sharply to trade at around their fair value than to have a bevy of companies with an artificially inflated market value.

With the arrival of the euro the question now becomes to what extent will investors continue to invest - or remain invested - in domestic companies, when investing in the public companies of eurozone countries will no longer carry an exchange risk.

The euro effect remains to be gauged over a number of years. Both institutional as well as individual investors are likely to be more attracted than at present to overseas euro-denominated financial assets. They will pay more critical attention than hitherto to local price/earnings ratios in comparison to those of companies in the same sectors in the eurozone. Nevertheless, the financial assets offered by local companies are likely to continue to attract some interest, though it may become more difficult for the quantum leap to take place. Institutional investors in particular will want to show a degree of commitment to the domestic economy.

For some time it was rumoured that the Stock Exchange of Ireland could be interested in the Malta Stock Exchange. There may have been discussions behind the scenes. If so, nothing has materialised.

To the extent that the financial sector is growing it is happening because access to the European Union has made it possible for various foreign financial institutions to set up a presence in Malta to passport their products to the rest of the EU.

They are finding the Malta location quite competitive, both due to the quick response of the Malta Financial Services Authority, as well as the availability of qualified human resources at competitive rates.

As the sector matures it is not unlikely that financial companies with an operating presence more far flung than our two main competitors - Luxembourg and the Republic of Ireland - will also be interested.

The ongoing and prospective growth of Malta as an international financial centre will not automatically translate into more domestic companies tapping into the Malta Stock Exchange for their capital requirements. They will be aware that prospective buyers of initial public offers will make comparisons with what's available in the more liquid external euro market.

It is surprising, in fact, that there has not been some surge of interest by domestic companies to capitalise on their record before Malta adopts the euro. It is less surprising that the bigger companies are already exploring the possibility of obtaining bank financing from foreign banks, hoping to get it at keener rates of interests, relative to the euro libors, than they are getting now. Whether their hopes are fulfilled will be another matter.

As John Consiglio, a banking expert, has recently pointed out in some detail in this newspaper, lenders set their margin over the applicable libor according to their assessment of the creditworthiness of the applicant. In other words, there will be no automatic downward shift in the interest rate structure with the adoption of the euro, though borrowers will have more leeway to bargain with domestic lenders.

The road seems set to become more uphill for the Malta Stock Exchange. Adoption of the euro, plus the roller-coaster experience which has left some foolish investors who believe in forever-and-ever tales nursing bad burns, will ensure that. Another recent experience will not help to brighten the mood.

The shareholders of the company formed to develop and run the marina at Cottonera - Grand Harbour Marina Ltd - made it the latest company to test the Stock Exchange waters.

The IPO was successful enough, enabling the old shareholders to pocket a tidy sum.

They did so in the context of a guarantee that they would remain "locked in" the company for a reasonable period of time. Such a guarantee is usually given to demonstrate the existing shareholders faith in the shares they are offloading, to dispel any creeping doubt among potential investors.

Barely had the computer forms been distributed to the successful applicants for the offered shares that shareholders old and new were presented with a resolution dissolving the old shareholders' obligation to remain locked in. The resolution was approved and the old shareholders sold their shares.

As it happens the buyers, Camper and Nicholsons, are a major name in the yachting sector. They will add further value to the Maltese economy. The point I am making does not concern them. It relates to the need for the Stock Exchange to be treated with better understanding and respect, if it is to figure well along the foreseeable future.