The Maltese capital market has been negatively impacted by the political developments that erupted in the past few weeks.
The MSE Equity Price Index, which measures the performance of the shares quoted on the Official List of the Malta Stock Exchange, had advanced by 7.2 per cent until the first week of November after reaching the highest level in over 11 years on September 30. However, as the political landscape began to change and new revelations unfolded almost on a daily basis, the index eased while volumes plunged reflecting the immediate reaction by the investing public as investor sentiment was impacted.
In fact, over recent weeks, the MSE Equity Price Index shed 4.7 per cent thereby reducing this year’s gain to a mere 2.3 per cent. The impact on investor sentiment is also very evident from the trading volumes across the equity market.
Until the first week of November, the average weekly volume across the equity market amounted to just under €1.9 million and this shrank to under €1.1 million in recent weeks reflecting the immediate impact from the worrying political developments that unfolded.
While not all movements across the equity market may be directly attributable to the political developments, share prices of several companies declined leading to a marked negative impact on the overall performance of the Maltese equity market. The aggregate value of the local equity market contracted by €250 million in recent weeks, with the major declines in terms of market cap taking place in BOV (-€52.5 million), IHI (-€52.3 million), MIDI (-€46 million), HSBC (-€43.2 million), MIA (-€40.6 million), and GO (-€14.2 million).
The worst performer in percentage terms in recent weeks was MIDI plc as its share price tumbled by 30 per cent. MIDI announced early last week that discussions with Tumas Group, which had begun in early 2018 in connection with the possibility of establishing a joint venture with respect to the development of Manoel Island, ceased by mutual agreement. Nonetheless, MIDI reiterated that it remains fully committed to the Manoel Island project and that the development works will commence once the required planning permits are issued.
International Hotel Investments plc was also negatively impacted with its share price registering a double-digit decline in recent weeks. IHI’s share price dropped by 10 per cent from €0.85 to €0.765. While IHI’s property portfolio is not solely exposed to Malta as the group owns properties in several countries, the market may have taken into consideration the ensuing uncertainty from the political landscape to the large-scale development that was being contemplated in St George’s Bay which required approval by Parliament.
As investor sentiment weakened and many investors questioned the economic impact from the severe dent to Malta’s reputation, it was no surprise that the share prices of the large retail banks continued their downward trend. Since early November, the share price of Bank of Valletta plc shed a further eight per cent to its lowest level in over 10 years. Likewise, the equity of HSBC Bank Malta plc declined by 9.2 per cent to a 16-year low. In the midst of the political crisis, HSBC announced that as a result of its strategic plan to increase its focus on digital banking services and to modernise its branch network, it is expecting to reduce its headcount by around 180 employees. This will translate into a restructuring charge of approximately €16 million which will be recognised in the 2019 financial statements.
Reputational damage ‘has now reached unprecedented heights and may continue to do so until justice is served
Although Malta International Airport plc announced on November 6 that it is expecting to surpass its financial targets published at the start of the year (revenues of €96 million and a net profit of €31 million), the share price of the airport operator dropped by 4.1 per cent in recent weeks to a three-month low of €7.
The corporate bond market was also impacted by the developments in recent weeks. Understandably, the bonds that suffered most were the two issues of Tumas Investments plc after a former director, Yorgen Fenech, was arraigned in court for allegedly being involved in the assassination of journalist Daphne Caruana Galizia in October 2017. The price of the five per cent Tumas Investments plc 2024 bond plunged by 848 basis points and that of the 3.75 per cent Tumas Investments plc 2027 bond shed 700 basis points. Last week the company announced it was appointing independent experts to verify whether the Tumas Group benefited from any illicit activities being attributed to Mr Fenech.
Other bond prices were also particularly impacted as the rumour mill was in overdrive. The prices of the two bonds issued by Mercury Projects Finance plc were particularly volatile and also dropped below their par value. The 3.75 per cent Mercury Projects Finance plc 2027 bond dropped to a low of 95 per cent on November 28 but then partly recovered to 100 per cent. Likewise, the 4.25 per cent Mercury Projects Finance plc 2031 bond dropped to a low of 95.50 per cent, also on November 28, before trading back up to 101.50 per cent. Another notable movement was seen in the 4.35 per cent SD Finance plc 2027 bond which dropped to a low of 99 per cent from a level of 104 per cent and has since stabilised at around par.
In the midst of this political upheaval and weakening investor sentiment which was also felt across certain sections of the corporate bond market, it is remarkable that the new bond issues by AX Group plc totalling €25 million were heavily oversubscribed and closed almost 10 days earlier than originally planned.
The statements issued in recent days by certain influential bodies and associations reflect the seriousness of the situation as the unprecedented crisis across Malta naturally impacted business and investor sentiment. The Institute of Financial Services Practitioners rightly noted that the “financial services industry is entirely based on a jurisdiction’s sound reputation” and as such demanded that all those “in positions of responsibility and leadership and linked in any way to assassination, money laundering, abuse of public office or corruption must step back in the national interest”. On its part, the Chamber of Advocates argued that “the current state of affairs is untenable and certainly cannot be prolonged”. It also stated that “the uncertainty, the lack of trust that this creates in important institutions will only increase instability in the country and further obfuscate our international reputation”.
The Chamber of Commerce issued various statements in recent weeks in which it clearly indicated the reputational damage Malta is suffering as a result of current developments. The Chamber of Commerce opined that reputational damage “has now reached unprecedented heights and may continue to do so until justice is served”.
Investors need to assess various risks when undertaking investment decisions. One of the many risks which must be taken into consideration is the country risk. This is made up of economic, political and business risks. Although in the recent past many Maltese may have taken this for granted as Malta’s country risk was never considered to be a detrimental factor, recent events have undoubtedly elevated the country risk – which impinges on the valuation assessments of local companies. International investors looking at Malta will also factor in a higher country risk following the recent political turmoil.
Hopefully, the situation will not deteriorate further and corrective measures will be undertaken by all concerned to address the damage inflicted upon the country’s reputation. This should be the foremost priority of all stakeholders involved in ensuring that the negative economic impact from recent events is contained and all factors required for the proper functioning of a capital market are in place at all times.
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