Curmi & Partners

The Resilience of the Local Market in the Midst of the Pandemic

By Simon Gauci Borda

The pandemic has left a negative mark on global equity and bond markets as business and economic conditions have worsened severely. These factors led to global financial markets turning bearish with the Maltese financial markets not being spared.

Market indices show that during the period under review the local market was less volatile than European markets. The European equity market, as represented by the Europe Stoxx 600 Index, declined by 11% during the first six months of 2020 while the local MSE Equity Index lost 12%. At face value these figures show that both markets performed similarly, however, the drawdown seen in the European stock market was deeper resulting in a drop of circa 34% by 23rd March. On the other hand, the sell-off in the local equity market was of just 20% when the index reached its low on the 24th of March.  Conversely, the rebound in the European equity market by the end of June was of 30%, while the MSE index recovered by 10% from the lows seen in March.

The MSE Corporate Bond Total Return Index, which tracks the performance of the most liquid local corporate bonds dropped by 3.5% when it reached its lowest point on the 25th of March. The sell-off in the European investment grade and high yield corporate bond markets, as measured by the Bloomberg Barclays Indices saw declines of 3% and 19% since the start of the year up until these indices reached their low point for the year. During the rebound, the MSE Corporate bond index recovered by 5% by the end of June while the European investment-grade and high-yield total return indices recovered by 4% and 18% respectively.

Therefore, generally speaking, both the local equity market and the local corporate bond market were less volatile than the broader European markets. However, other factors may be explaining the apparent resiliency and lower volatility in the Maltese markets.

One data point which may explain the behaviour of the local financial markets during this extraordinary period may be the volumes (i.e. the amount of trades executed) on the local market.

Figures provided by the Malta Stock Exchange show that during the first six months of the current year, there has been a steady decline in volumes on the local market once the first COVID-19 case was detected and the implementation of the lockdown enforced by the Government in March. In fact, in April trading volumes within the equity and corporate bond markets declined by 53% and 31% respectively. Subsequently in May, trading volumes in the local equity and corporate bond markets declined by another 38% and 28% respectively.

While lower volumes could explain the lower volatility seen within the local market, it may not be the only factor. Government intervention also played a part in boosting sentiment in local investors as the current administration announced its commitment to ensure the smooth functioning of the local capital markets. The government indicated that it will ensure that all coupon payments on corporate bonds will continue to be serviced. Moreover, the government announced that it will offer to act as an underwriter for bond roll-overs. Such government communication implies a substantial commitment to support the local market which played a key role in restoring confidence in local investors.

The improvement in investor confidence seems to be evidenced in the remarkable oversubscription in the latest Mediterranean Investment Holdings plc bond rollover as well as the recent government bond auctions. The bond issued by Mediterranean Investment Holdings plc was oversubscribed as the issuer received €49.5 million worth of applications when it required €20.0 million. Similarly, the Maltese Treasury was able to issue eight Government bonds between May and July with a total nominal value of €850.0 million which were all oversubscribed by more than twice the amount required. The oversubscription of these bonds could also be the result of an increased savings rate during the pandemic as consumers curtailed their expenditure.

While the local market has fared better than European markets during the period affected by the pandemic, it is imperative that local investors remain cautious as the short-term performance of a listed security may not be a true reflection of the underlying investment risks in view of the challenging business conditions. The publication of financial results covering the first half of the year as well as the updated Financial Analysis Summary produced for local securities may provide market participants with a clearer glimpse as to the true extent of the damage suffered by local issuers.

The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd. is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.