MGS outperform shares in Q3

The third quarter came to a close last Monday and the main highlight during the summer months is generally the interim reporting season while trading activity usually softens. However, from a quick analysis of the headline figures, it is evident that despite the new multi-year high of the MSE Equity Price Index, Q3 2019 was also characterised by the outperformance of Malta Government Stocks compared to shares.

In my articles over the past two weeks, I provided ample details of the decisions taken during the latest monetary policy meeting of the European Central Bank (ECB). Although the announcement by the ECB took place on 12 September, sovereign bond prices across the eurozone had been rising well ahead of the event as it had become evident from the disappointing economic data emerging as well as from recent statements by members of the ECB that the central bank would have to introduce new stimulus measures.

In fact, yields declined to fresh record levels at the beginning of September with the 10-year German benchmark bund yield dropping to as low as -0.74% after breaking through the negative barrier again in the second half of March 2019. All German bonds were recently trading with negative yields as the 30-year bund dropped to a negative yield of -0.31% in August.

The rally in sovereign bond prices throughout most of 2019 resulted in yields dropping below the previous all-time low in July 2016 when the 10-year German benchmark bund yield had dropped to -0.20% before initiating an extended recovery to almost +0.81% by the first half of February 2018.

The intense volatility seen across eurozone bond markets over the past few years was also reflected in Malta with similar movements across Malta Government Stocks. In fact, during the third quarter of 2019, MGS prices sustained their rally seen since the start of 2019. The Rizzo Farrugia MGS Index advanced by a further 3.2% during the summer months thereby outperforming the MSE Equity Price Index which added just over 2%.

The Rizzo Farrugia MGS Index gained 7.6% since the start of 2019 after partially retreating from a fresh all-time high recorded in late August. Prices of medium and long-term MGS rallied to new record levels having surpassed the previous all-time highs seen in 2016. The Rizzo Farrugia MGS Index is so far on track for its second-best annual performance ever. In fact, the best year ever recorded was in 2014 with a gain of 8.4% shortly before the start of the ECB’s first QE programme in early 2015. Despite the aggressive bond buying programme by the ECB until the end of 2018, the Rizzo Farrugia MGS Index registered milder gains in 2015 (+2.7%) and 2016 (+1.8%) and performed negatively in the following two years with declines of 3.5% in 2017 and 1.7% in 2018. It is also worth highlighting two other major milestones across the MGS market during the third quarter of the year. Firstly, yields across the entire MGS market are now below the 1% level following the strong upturn in prices. The yield on the longest dated MGS, the 2.4% MGS 2041, dropped below this important level on 5 August as the price climbed by over 13 percentage points since 30 June and by almost 27 percentage points since the start of 2019.

Moreover, during the most recent primary market offering held in the first half of September, it was the first time that the Treasury issued new MGS at a negative yield. The statistics published by the Treasury following the recent auction indicate that the yield on the 6-year paper (i.e. the 0.5% MGS 2025) was -0.15% at the cut-off price of 104.01%. There were €55 million nominal allotted last month compared to total demand of over €170 million. The yield on the highest accepted tender of 104.33% was -0.20% while the yield on the weighted average price of the accepted bids of 104.19% was -0.18%.

Although the equity market underperformed the MGS market during the summer months, the third quarter was another positive one for the Maltese equity market with the MSE Equity Price Index adding 2.1% and the MSE Total Return Index advancing by 2.3%. Moreover, it is worth highlighting that since the start of 2019, equities are still outperforming Malta Government Stocks as the MSE Equity Price Index has so far gained 8.8% while the Rizzo Farrugia MGS Index is up 7.6%.

Another important milestone to note is that the MSE Equity Price Index has now risen to its highest level since late January 2008 despite two of the larger caps having continued to underperform during the third quarter of the year.

The market capitalisations of Bank of Valletta plc and HSBC Bank Malta plc account for 22% of the overall market capitalisation across the Regulated Main Market and therefore movements in the share prices of these two banks largely influence the performance of the wider benchmark index. Moreover, as explained in some of my articles in the past, in view of the fact that only the ‘A’ shares of Malta International Airport plc are listed on the MSE, only 60% of the issued share capital is taken into consideration in the calculation of the MSE Equity Price Index. As such, the performance of the MSE Equity Price Index needs to be analysed also in the context of the weaker performance of the two banking equities. In fact, BOV lost 2.1% during the third quarter after partially rebounding from a near 10-year low. HSBC registered a weaker performance as the equity shed 11.2% during the last quarter after slightly recovering from its near fifteen-year low. On the other hand, MIA added 5.7% as the equity first moved closer towards its all-time high recorded earlier this year in May but lost some of its strong momentum in the second half of September. The gain of almost 6% in the share price of MIA is not fully accounted for due to the listing of only the ‘A’ shares of the airport operator.

The most positive share price performances during the third quarter of the year came from RS2 Software plc (+22.4%), PG plc (+15.4%), Santumas Shareholdings plc (+11.7%) and Simonds Farsons Cisk plc (+11%). On the other hand, the only equity to post a double-digit decline was HSBC Bank Malta plc at -11.2% which resulted in HSBC’s market cap dropping to €515 million (compared to over €2 billion in April 2006) and being surpassed by International Hotel Investments plc with a market cap of €529.5 million.

The 22.4% rally in the share price of RS2 Software plc helped the equity to rank as the best performer during the nine-month period to 30 September with an overall gain of 53.5%. In its half-year financial report published on 29 August, RS2 claimed that it is in the process of securing a couple of significant deals in the US which are planned to be concluded before the end of 2019 which will enable RS2 to support the acquiring and issuing business of their customers to expand in more than twenty countries globally. RS2 had been reporting progress of their penetration into the US market for several months. In fact, in December 2018, RS2 indicated that there are ‘Tier-1 financial institutions’ among its potential customers in the US while in the 2018 Annual Report published in April 2019, CEO Mr Radi El Haj stated that “RS2’s USA subsidiary is currently attracting some of the largest US acquirers to on-board as managed services clients”. Moreover, during the Annual General Meeting in June 2019, RS2’s CEO claimed that negotiations are taking place with one of the largest acquirers in the US and the company also has a significant pipeline of other potential clients in the US. The reported progress of the successful penetration into the US market is one of the major factors which boosted the share price of RS2 in recent months.

Last week, Trident Estates plc announced the details of its €15 million rights issue which will be one of the main corporate actions taking place by the end of the year apart from other corporate bonds being issued. Meanwhile, movements across the equity market will continue to be characterised by individual company announcements while MGS price movements will continue to reflect monetary, economic and political developments taking place across international financial markets.

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