Curmi & Partners

Reassessing Risk

By David Curmi

It is now six months since the onset of the pandemic. During this time, the world as we knew it then has changed, both from a commercial as well as a social perspective. Within the commercial sector, some industries, most especially the hospitality and property sectors, have been hit much harder than others, and in a more direct manner. Others, such as the banks have also been affected but more in terms of second round effects.

With the passage of time we are able to begin to build a clearer picture of the impact that the pandemic is now having on the financial strength of companies that have securities listed on the Malta Stock Exchange. Following the end of June, local companies reported their financial results for the first six months of the year. These results incorporated almost 4 months of post pandemic operations. Investors would do well to review these results closely to better understand the strength of the companies they are invested in, and the risks that they are now faced with. Both these aspects have changed materially since March.

Let’s look at each characteristic individually. The strength of a company emanates from various aspects, each of which adds to or detracts from its overall strength. It could be the robustness of the business model, its balance sheet, its ability to generate cash profits, the size, geographic location and diversity of its market, the quality of its management and even the level of corporate governance and transparency that it embraces. As these aspects grow or subside, one would expect that the risk associated with that company also changes. The price at which that company’s securities trade, whether they are bonds or equities, is the translation of that change in risk into monetary value. It reflects a statement by investors who by purchasing or selling such a security are saying that that is the value they ascribe to that investment, taking into account the current risk, and the expectation of how that will change in future.

With that in mind it is interesting to see how some of the local securities have traded throughout the pandemic. Take the shares of MIA, a company right in the cross hairs of the pandemic. It shares traded at a high of €7.65 per share in October 2019, only to fall to €3.52 in the March 2020. One can rationalise this in the context of the deterioration in prospects for this company in the short and medium term. No travelling for a few months, minimal travelling for an unknown period thereafter. It is quite straight forward to see why there was such a move. Longer term one could also argue that Malta has only one airport and that at some point business will pick up again. This is also true, but behind this assumption is the fact that MIA will remain a viable company. One can make this assumption on the basis of the strength of MIA’s balance sheet and the company’s ability to steer its way through the pandemic, avoiding any terminal damage.

Similarly, one can look at a number of fixed income securities on the MSE. Here the moves have been far more controlled, bar the odd exception, and yet this may be somewhat surprising, especially when a comparison is made to the price movements on international markets. Is this because local companies are more resilient? Is it because there is a limited understanding of the risks such companies are facing, or perhaps a reluctance to exit an investment below the original issue price of par (100)? Or perhaps there is a solid belief, mistaken in my opinion, that companies who have bonds on the MSE do not and will not default? In fact, it is probably a mixture of these, to a lesser or greater degree.

With fixed income securities it is important to remember that, unlike with equities, there is a contractual commitment to pay regular interest, as set out in the prospectus. Any failure to pay this is likely to lead to the company being wound down or restructured. Fortunately, we have not had any such situations locally, and hopefully this will be avoided, but the risks are certainly rising as the pandemic stretches out. Sadly, there is real pain out there in certain sectors. Pain that will only be reflected once the year-end accounts are published. Investors should therefore pre-empt this and assess the risks their portfolios are carrying and, given their current predicament, decide whether they ought to continue holding such risks or perhaps exit completely or even switch to lower risk investments, where although the coupon may be lower, the risk of default is also much lower.


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.