2020 was an unprecedented year in many ways. However, one of the fundamental lessons when it comes to investing is that markets always look ahead. Investment professionals earn their coin by trying to anticipate the market and scan for vital signs. After a pandemic-induced collapse in the global economy and the vaccine rollout well underway, analysts are forecasting a gradual start to recovery in 2021.
Global growth is expected to start recovering, with the International Monetary Fund forecasting the world and EU’s GDP to grow by 5.5 per cent and 4.2 per cent respectively. This led to an increase in investor sentiment, which transpired in major equity markets rallying.
Malta’s recovery is expected to be lower than EU average in 2021, primarily due to the downside risks that COVID-19 has brought to the tourism sector and public finances, where the budget balance in 2020 for Malta according to the Central Bank of Malta latest estimates is expected to go down to 9.5 per cent of GDP. However, the latter is driven by the sizeable fiscal stimulus, which will support the economy during the pandemic.
In fact, Malta’s GDP contraction in 2020 is expected to be less than the European average. The budget deficit is expected to gradually improve both in 2021 and 2022. Furthermore, Malta’s government debt structure is favourable, where 85 per cent of government debt is held by domestic investors and carries a lower cost of debt.
Tourism is considered to be a major contributor to Malta’s GDP and as a result of travel restrictions imposed between Malta and major European countries, this will take its toll on our economic recovery. MIA plc recently published their annual traffic results, which showed that for 2020, traffic growth declined by circa 76 per cent compared to 2019. These are the lowest traffic results since 2002. Furthermore, as travel restrictions are still in place, February’s 2021 traffic results suffered a 93.5 per cent drop over the same period last year.
Looking beyond 2021, Malta is expected to have one of the highest GDP growth rates in Europe in 2022, with five per cent growth compared to the EU average of 4.2 per cent. The main drivers behind this strong growth are increased consumption, the slow but gradual return of foreign tourists as well as several large-scale investment projects which have been delayed in 2020. Furthermore, the limited rise in the unemployment rate and a moderate repatriation of foreign workers during the pandemic will further support the recovery.
Another pillar of the Maltese economy is its banking sector, which is considered to have strong capital and liquidity ratios and is in a good position to absorb higher loan losses caused by the pandemic. Non-performing loans, which are best defined as loans in which the borrower is in default and has not made payments for some time, remained moderate throughout the year. Furthermore, on January 14, the Central Bank of Malta announced that it has reactivated applications for new and existing moratoria.
Analysts are forecasting a gradual start to recovery in 2021
These fundamentals and projections are essential for investment professionals to look beyond the short-term challenges and focus on opportunities that will yield results in the future. The Maltese equity market has underperformed the European Index, MSCI Europe, over a period of one year. The magnitude of the pandemic on the Maltese equity market was not as severe as the European Index. However, the Maltese market lagged while the European market slowly recovered.
Since the end of November 2020, which is the period when positive vaccine news started flowing in, up to the end of February 2021, the Maltese equity market slightly outperformed the European Index.
This phenomenon might indicate the cyclical nature of the Maltese equity market. A cyclical market is a market that tends to do well when the economy is improving. In fact, when comparing the Maltese and European markets, the Maltese market has a cyclical tilt of around 74 per cent compared to the circa 55 per cent of the European Index.
An important characteristic that Maltese investors seek in the equity market are dividend distributions. In 2020, several Maltese companies decided not to distribute dividends given the detrimental impact that the pandemic had on their profitability. Also, banks and insurance companies were restricted from distributing dividends in order to preserve their capital position.
Malta has one of the highest vaccination doses administered in Europe and as things slowly start improving in Europe, the expectations of the return of foreign tourists and dividend bans on financials being lifted are solidified. In fact, it is the earnings season for the majority of locally listed companies and investors are noticing a gradual resumption to dividend payments, with HSBC Bank Malta plc being a case in point. These two factors are key for local companies to gradually start distributing dividends.
When analysing a particular security or market, investors should not only focus on the macroeconomic picture but also have to take into consideration the valuation of a particular asset. Valuation methods can be described as tools used to help investors determine the fair value of a security.
A simple and effective valuation metric used by investment professionals to fairly value an asset is the P/E ratio. This measure allows investors to be able to compare valuations of the asset either with itself using historical data or else with a similar asset or index.
Looking at the Maltese equity market’s P/E ratio compared to the European Index, the former is trading at cheaper valuations with the main reason being the underperformance seen in the Maltese equity market compared to the European index.
Historically, both indices traded at similar P/E ratios; however, the pandemic led to the Maltese index trading at lower levels compared to the European index. These factors might indicate that currently it might be a good opportunity to tap into the local equity market.
Investors should keep in mind that timing the market is close to impossible as the variables that influence the direction of the market are non-exhaustive. Furthermore, an asset is valued by different investors with contrasting ideologies, forecasts and behavioural actions.
It is therefore imperative that when making investment decisions, market participants are well informed about the current and forecasted economic conditions, whether the asset is being fairly valued while remaining unbiased when taking investment decisions.
Stephen Sammut, Investment specialist, BOV Asset Management Ltd