Client Newsletter – July 2014

International market developments

After a record-breaking 2013 on a number of counts, market views going into 2014 were mixed and understandably more cautious. Consensus views remained strongly in favor of equity as the preferred asset class. However, the combination of recovering growth and ultra-accommodative monetary policy has proved a sweet spot for markets.

Major equity indices are near all-time highs, credit spreads have continued to tighten, peripheral yields are at or close to multi-year lows and volatility has been low and close to pre-crisis (2008) levels. Indeed, equity markets continued to perform positively albeit at lower single-digit levels compared to last year with the exception of Japan’s Nikkei which recorded a negative half year performance after being the best performing stock market in 2013. After gaining 29.6% in 2013, the US S&P 500 continued to rise by a further 6% during the first six months of 2014. Similarly, the Dow Jones Industrial Average index gained a more modest 2% following a 26.5% gain last year. With the exception of the UK’s FTSE100 which recorded a marginally negative performance, the main European indices registered very mild gains.

Although this trend can persist for some time enabling both equity and bond markets to continue edging higher, market volatility can be expected to pick up as valuations in some instances in both equity and especially bond markets are high.

Local market developments

Following a strong 2013 when the MSE Share Index registered its best annual performance since 2005, the first six months of 2014 saw the MSE Share Index slide to rank as one of the worst performing markets so far this year (-10.53%). This results principally from the negative performance of three index heavyweights. These three index heavyweights (Bank of Valletta plc, HSBC Bank Malta plc and International Hotel Investments plc) account for 55% of the index whereas the remaining 18 listed equities comprise the balance of 45%.

A quick look at the performance of all the equities comprising the MSE Share Index in the table below highlights a number of interesting observations.

  • Observation 1:

Despite the remarkable returns last year, IT and telecoms remain the most resilient sectors and best performing stocks supported by various positive developments including new business opportunities or potential to realize the value of some of the assets held.

  • Observation 2:

Financial services stocks (mainly banks) have had a miserable six months and are clearly out of favour in view of a very challenging operating environment on a number of fronts especially in terms of the proposed new regulatory regime under the supervision of the European Central Bank (ECB). 

  • Observation 3:

International Hotel Investments plc remains the markets most notable laggard with no clear trend despite the sale of one of the Group’s non-core assets (11 of the 12 apartments in London) and the distribution of a cash dividend. 

  • Observation 4:

The stable dividend payers, namely, Plaza Centres plc, Malita Investments plc and Tigné Mall plc remain well supported and in favour reflecting the search for yield in a low interest rate environment.

31-Dec-2013 30-Jun-2014 H1 Performance
MSE Share Index 3,685.790 3,297.626 -10.53%
Index Constituents (ranked in order of performance)
RS2 Software plc IT 2.153 2.650 23.07%
GO plc TELECOMS 1.825 2.040 11.78%
6pm Holdings plc IT 0.673 0.750 11.43%
Malta International Airport plc AIRPORT OPERATIONS 2.160 2.290 6.02%
Malita Investments plc PROPERTY 0.530 0.550 3.77%
Simonds Farsons Cisk plc FOOD/BEVERAGES 2.850 2.950 3.51%
Plaza Centres plc PROPERTY 0.575 0.590 2.61%
Tigné Mall plc PROPERTY 0.515 0.520 0.97%
MaltaPost plc POSTAL OPERATOR 1.150 1.150 0.00%
Grand Harbour Marina plc YACHT MARINA 1.820 1.820 0.00%
Middlesea Insurance plc INSURANCE 0.900 0.880 -2.22%
Crimsonwing plc IT 0.850 0.810 -4.71%
Medserv plc OIL & GAS SERVICES 1.280 1.200 -6.25%
Island Hotels Group Holdings plc TOURISM 0.900 0.820 -8.89%
HSBC Bank Malta plc FINANCIAL SERVICES 2.340 2.022 -13.59%
Lombard Bank Malta plc FINANCIAL SERVICES 1.724 1.465 -15.01%
Bank of Valletta plc FINANCIAL SERVICES 2.408 2.020 -16.12%
MIDI plc PROPERTY 0.290 0.240 -17.24%
GlobalCapital plc FINANCIAL SERVICES 0.800 0.659 -17.63%
International Hotel Investments plc TOURISM 0.950 0.755 -20.53%
FIMBank plc FINANCIAL SERVICES $ 0.886 0.700 -21.03%

On the domestic Sovereign bond market, the Rizzo Farrugia MGS Index reached a new all-time high of 1,055.576 points representing a 3.7% increase since the start of the year – a very strong run indeed. The local MGS benchmark trended higher for six consecutive months as Eurozone yields approached all-time lows amid economic challenges across the region which spurred the ECB to enact further stimulus measures including the introduction of negative deposit rates.

The corporate bond market saw, as anticipated, a surge in new issuance which was all exceptionally well received by a buoyant market for fixed income. Secondary market prices remained strongly supported with yields dropping across the board reflecting developments in the sovereign sector.

Outlook

As expected and indicated in our last newsletter six months ago, 2014 has so far been a more ‘normal’ year in terms of overall market performance. As such, despite the return to normality, bouts of volatility and occasional ‘off’ days should not come as a surprise and are increasingly likely. Nevertheless, the outlook remains fairly positive predominantly for equities which remain, on almost all counts, the most sensible asset class to maintain an exposure to. This is not to say that fixed income (bonds) will turn out of favour overnight. However, bond prices cannot and will not continue to rise indefinitely and volatility in this asset class is also bound to revert sooner rather than later.

On the domestic front, the performance of the MSE Share Index has been most disappointing but not entirely surprising. For those investors who diligently repositioned portfolios over the past few years to reduce their overall dependency/exposure to the banking sector (traditionally most investors have always been overweight banks), the performance of the Index is clearly not reflective of their own portfolio performance. Indeed, we had taken an active role in repositioning some portfolios to focus more on the IT sector two years ago and consequently, to lower dependency/focus on the traditional heavyweights in view of clear signals of stronger value and earnings visibility in IT. Effectively, more widely diversified portfolios have undoubtedly returned positive performances so far this year and there is nothing to indicate that this positive trend should not continue subject to a lack of any surprise negative earnings/announcements. Portfolio diversification is key and regular review is, from our perspective, even more important.

Our central view on local equities remains positive for most sectors with the exception of financial services, where the challenging operational but mostly regulatory environment is set to continue piling pressure on margins and therefore on shareholder returns.

On the fixed income side, the local market is set to continue to be dominated by a run of new issues primarily on the corporate side as companies are eager to fund their operations on a longer term basis and investors remain very eager to consider corporate bonds for income-generation purposes. Given the buoyancy of the market, we encourage investors to maintain a level of caution and to analyse each issue on its own merits independently of interest rates offered. All investments carry risk and there are NO exceptions. Careful analysis is paramount in all cases and each opportunity should be considered on its own merits.

Finally, one cannot conclude without mentioning the increasingly alarming geo-political risks surrounding us which could easily have a strong impact on the direction of markets. The escalating problems in Russia and Ukraine, the ongoing upheaval in Israel and Palestine and last but not least, the never ending saga in Libya, are all causes for great concern and should never be overlooked in one’s investment decision-making process.

Rizzo, Farrugia & Co. (Stockbrokers) Limited

18th July 2014

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.