Client Newsletter – July 2013

Local market developments

After gaining 3.8% in calendar year 2012, the performance of the MSE Share Index gained further momentum during the first half of the current year. In fact, the local equity benchmark climbed 6.4% higher during H1 2013. Interestingly, the Malta Stock Exchange has outperformed most European markets during the past six months, a result not seen in some time but also one which is not unexpected. We have long been advocating that locally listed companies have been performing generally well and it was only a matter of time before the market ‘re-rates’ companies accordingly. Six months ago we stated that valuation multiples (price earnings ratios and dividend yields) are presently the most attractive in a long number of years and during the past six months the market has indeed witnessed increased investor interest as also amply evidenced by the substantial increase in trading activity. In fact, trading activity in equities during the first six months is up by over 60% compared to the same period last year.

The local equity market has therefore continued to recover following the 2008/09 downturn and is currently up 29.6% from the multi-year low of 2,636.388 points recorded on 13 April 2009. During the last week of June, the MSE Share Index reached a 2-year high of 3,440.620 points and the upturn in recent months is very much spearheaded by some of the smaller capitalised companies, particularly the IT companies. However, it is also interesting to note that various equities registered double-digit returns in the past 6 months.

This is once again testament to our firm belief that prices do eventually move in line with positive news flow and company performance and rewards those investors who sought exposure to certain companies at times when market sentiment was weak and share prices did not reflect the future potential of the company.

Client Newsletter - July 2013

Local bonds also performed positively during the first half of 2013. The Rizzo Farrugia MGS Index which tracks the movements across the local sovereign bond market edged a further 1.5% higher during the first six months of 2013 following the rise of 1.7% during 2012. The Rizzo Farrugia MGS Index rallied to a fresh all-time high of 1,025.288 points on 3 May 2013 but eased in recent weeks as yields recovered from their lows after the US Federal Reserve warned that it could consider starting to scale back its bond-buying program as a result of an improving outlook for the US economy. Most local corporate bonds also maintained their above-par values but trading activity declined in view of the general lack of supply in the market.

International market developments

Meanwhile, international equity markets were more volatile especially in recent weeks. In fact, as a result of the sharp correction since the third week of May, the 6.4% growth in the local equity market enabled the MSE Share Index to outperform the larger European indices. The FTSE 100 in the UK closed the reporting period with a rise of 5.4% following a decline of 5.6% during the month of June, with the DAX30 in Germany likewise showing a 4.6% gain in the first six months after a similar correction in June. The French market closed minimally higher with negative returns recorded in Spain and Italy. Meanwhile, the US markets performed more positively with the Dow Jones Industrial Average covering 30 companies rising by 13.8%, the S&P500 showing gains of 12.6% and the technology-based NASDAQ up 12.7%. However, until May many of the major international equity markets rallied to new multi-year or all-time highs but then suffered steep declines in June. The change in direction in the markets took place after officials from the Federal Reserve in the US indicated their intention to gradually start reducing the amount of stimulus (QE) in the markets.


While international investor sentiment seems to have changed following the events of recent weeks and one should expect increased volatility to characterise the equity as well as bond markets in the months ahead, the local equity market has become very much event-driven with trading activity and share price movements materializing after the publication of company announcements. This was very much evident in the movements and the high volumes seen in the equities of the IT companies as well as of various other companies.

The outlook for the local equity market over the next six months is therefore very much dependent on each specific company and upcoming developments. A number of important announcements are likely to characterise the performance over the coming weeks and months.

Moreover, the expected new issues in the bond market is another important development expected for the second half of the year possibly providing investors with some renewed opportunities to diversify their portfolios further.

Investors should therefore increasingly rely on information and research from financial analysts who closely follow individual company developments to position their portfolios accordingly. 

From a bond perspective, the recent international developments indicate that bond prices (both locally as well as internationally) are expected to become more volatile in the months and years ahead. Although many local investors may view bonds as investments that are normally held to maturity, it may be a concern for some to see wide fluctuations in secondary market bond prices from one period to the next. Longer-term bonds are more volatile than bonds of a short-term maturity and as a result, it is generally advisable for investors to hold a larger percentage of short-term bonds in a rising interest rate environment as opposed to long-term bonds in order to preserve the value of the portfolio.

With many investors in recent years possibly exposing themselves to more longer-term bonds than usual in view of the more ‘attractive’ coupon as opposed to short-term bonds, a re-positioning of one’s investment portfolio may be important in the months ahead since prices of long-term bonds could easily fall below their nominal value during their lifetime. While this may not be a concern for investors who only require the semi-annual interest payments from such bonds, it may become more disturbing for those investors who may require selling out of such investments before their redemption date.

Our general feeling expressed six months ago that shares remain our favoured asset class for 2013 still holds. We continue to believe that selected equities present a better investment case for investors as opposed to bonds.


Rizzo, Farrugia & Co. (Stockbrokers) Limited

3rd July 2013


This document was prepared by Vincent E Rizzo, Director, Rizzo, Farrugia & Co. (Stockbrokers) Ltd (RFC), members of the Malta Stock Exchange and licensed to conduct Investment Services business by the Malta Financial Services Authority. This document has been prepared in accordance with legal requirements. It is intended solely for distribution to its clients. Any information in this document is based on data obtained from sources considered to be reliable, but no representations or guarantees are made by RFC with regard to the accuracy of the data. The opinions (if any) contained herein constitute our best judgement at this date and time and are subject to change without notice. This document is for information purposes only. It is not intended to be and should not be construed as an offer or solicitation to acquire or dispose of any of the securities or issues mentioned herein. Since the buying and selling of securities by any person is dependent on that person’s financial situation and an assessment of the suitability and appropriateness of the proposed transaction, no person should act upon any recommendation in this document without first obtaining investment advice. 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 document have had a reasonable opportunity to act thereon. RFC accepts no responsibility or liability whatsoever for any expense, loss or damages arising out of, or in any way connected with, the use of all or any part of this document. RFC may have or have had a relationship with or may provide or has provided other services of a corporate nature to companies therein mentioned. Past performance is not necessarily a guide to future returns. The value of investments and the income derived therefrom may fall as well as rise and investors may not get back the amount originally invested. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. No part of this document may be reproduced at any time without the prior consent of RFC. All intellectual property and other rights reserved.