Imrith Ramtohul sees share prices continue falling over the next few months given the lack of visibility. He fears that the higher interest rates might push the global economy into recession.

How do you view investors’ changing behaviour following increasing interest rate from central banks to curb rising inflation rates?
Much depends on which type of investment we are looking at. Let us start with bonds, which are fixed income investments and which are considered safer than shares. When investors start to anticipate an increase in rates, bond yields tend to move higher. This has actually been the case so far in 2022. We have seen bond yields rising in many countries around the world, including Mauritius.

Having said this, it is important for me to state that the price of bonds tends to move inversely with interest rates. Investors should thus be prepared to see a fall in the value of their bonds due to the higher interest rates. However, they will not lose money if they hold these bonds until maturity, assuming that the bond issuer does not default on the capital repayment.

Another important consideration is that bond yields are actually well below the inflation rate in many countries. The real yield is thus negative and therefore investors may not be motivated to invest at such negative real yields. To my knowledge, South Africa is currently one of the rare countries whereby long-term bond yields currently exceeds inflation. The 10-year bond yield is 10.4% while inflation is around 6%.

And when it comes to shares?
Higher interest rates often means higher borrowing costs for companies, which may then result in lower profitability. Higher interest rates can also make interest-bearing instruments like bonds and fixed deposits more attractive to investors, which may result in lower demand for shares. Higher interest rates may also suggest that companies will have to spend more to service debt and less on capital investments and this could negatively affect their future earnings growth. Therefore, higher interest rates may have a negative impact on share prices.

We have seen the major foreign equity indices fall signifi- cantly in the first half of 2022. Share prices have lost ground due to soaring inflation, the Russia-Ukraine crisis and the aggressive monetary policy being adopted by central banks to raise interest rates significantly. The S&P 500 Index has lost 21% since January and it actually suffered its worst first half of a year since 1970! The tech-heavy NASDAQ decreased by 29%. The MSCI All Country World Index (an index designed to track broad global equity-market performance) in turn lost 20% in USD terms during the same period.

Many investors are now worried that these central bank actions could push the global economy into recession. Should this happen, share prices could fall even further. There is definitely a lack of visibility! As for gold, its price has around lost 1.6% in USD terms during the first half of 2022. The main reason for the price fall is once again the higher interest rates.

Financial centres’ specialists see the stock markets as being bearish today. Are you of this opinion? Should equities still be bought as a long term investment?
A bear market arises when a market experiences prolonged price declines. It typically describes a condition in which share prices fall 20% or more from recent highs due to pessimism and negative investor sentiment.

As mentioned earlier, most of the famous equity indices have already lost important ground since the beginning of 2022. The MSCI All Country World Index coincidentally has lost 20% in USD terms during the same period. Investors therefore indeed seem to be bearish at international level.

In my opinion, share prices could continue to fall over the next few months given the lack of visibility. There are fears that the higher interest rates might push the global economy into recession. Any positive news such as a sharp drop in inflation or the sudden end of the Russia-Ukraine crisis should be highly positive for stocks! I would humbly hope to see this happen soon!

Long term investors could however consider the current price weakness as a buying opportunity and they may gradually buy shares. It should be mentioned that equities have tended to deliver returns ahead of inflation over the long run. History shows us that market declines are a feature of investing, and that volatility should be expected from time to time. Over the long-term, markets tend to rise.

Remember as well that not all companies are expected to be adversely impacted by rising inflation. In the current environment, investors may look for shares that might potentially benefit from a rise in interest rates. During periods of infla- tion, sectors like finance, consumer goods and energy often tend to perform better than others since a rising interest rate environment increases their earnings.

Given the economic impact of the war in Ukraine, after that of the pandemic crisis, the world is witnessing inflationary pressures. How do you expect the markets to react to such economic uncertainties?
As mentioned already, most countries are being impacted by rising inflationary pressures, the continuing war in Ukraine and supply chain challenges. Central banks around the world have been aggressively increasing interest rates in an attempt to fight inflation. Any future developments in the war in Ukraine are unpredictable and this highly uncertain situation could persist for a while. The implication is that markets are likely to be very volatile in the months to come.

The unintended impact of higher interest rates is that this can result in lower borrowing and a decrease in consumer spending. This can contribute to lower economic growth which normally negatively impacts share prices. Higher inflation can also hurt the profitability of certain companies (due to cost pressures) and this may have an adverse impact on their share price.

We would also be expecting bond yields to move higher in the coming months. In contrast, the gold price will not normally benefit when interest rates are moving up.

Our stock exchange has not reacted to the last Budget Speech. Is it because our exchange is not interconnected to local and foreign events?
Between 7th June and 30th June 2022, the SEMTRI lost 1.8%. This might give the impression that the local equities have not reacted to the Budget Speech or that our exchange is not highly interconnected with local and foreign events. However, some caution is warranted and let me explain.

Since the start of 2022, the MSCI All Country World Index (ACWI) lost around 20% in US Dollar terms. Over the same period, the SEMDEX fell by 2.8%. As my analysis, the correlation coefficient between the SEMDEX and the ACWI (from 2008 onwards) stands at nearly +0.5 and is rather high. This effectively demonstrates that our exchange tends to move in a similar direction with foreign markets over time.

Of course, it must be acknowledged that our stock market is rather small and illiquid when compared to other countries. To add to this, the ACWI fell by 8.4% during June and the decline is much higher than that experienced by the SEMDEX. The much better relative performance of the local indices might partly be due to some of the Budget announcements.

How do you assess the performance of our stock markets in 2022 so far?
Over the first half of 2022, the local equity market fared rather well. The trend was supported by the publication of improved financial results and higher dividends declared by some of the local companies. Towards the end of April, the SEMTRI crossed the 9,000 mark for the first time and peaked at its all-time high in early May. However, soon after the SEM indices started losing ground.

Over the last two months (May and June), the SEMDEX and SEMTRI have posted negative returns of 7.1% and 6.1% respectively. MCB Group Limited and IBL Ltd which represent the two largest companies on the SEM each shed around 7% over the past two months. Note that these two stocks made up nearly 40% of the SEMDEX as at end-June.

Year-to-date, the indices were nevertheless still in the green territory as at 30th June. So, one can say that the performance has been rather decent in the first half of 2022. Howe- ver, it remains to be seen whether the local equity indices will maintain this trend during the rest of 2022.

Financial observers see the stock exchange lacking drive and proactiveness as to move it to a further level of its development. Do you share this view?
There have unfortunately not been many new listings of pure local companies on the official market over the past decade. The SEMDEX continues to be dominated by a few large companies. To illustrate, the 2 largest companies jointly make up around 40% of the Official Market total market capitalization. One would hope to see this percentage go down over time via additional listings.

In my opinion, the authorities could consider announcing new measures to encourage local companies to seek a SEM listing. Such listings would potentially make the stock market larger in terms of market capitalization, more dynamic and more liquid (more transactions taking place) over time. We could then see more investors (both local and international) showing interest in local shares.

Note that the 2020 Budget had mentioned the setting up of a Venture Capital Market at the Stock Exchange of Mauritius for start-ups and SMEs. Unfortunately, we have not witnessed much development on this so far. With such a market, investors will get the opportunity to invest in more companies and this will bring diversification to their portfolios.

During the last Budget, it was also announced that the Government intends to raise Rs 22 billion from the sale of equity during 2022/23. The names of the companies were not highlighted in the Budget Speech. I believe that a listing of some profitable companies with important Government ownership could also provide further depth to the local Stock Exchange.

It is to be noted that the SEM has, over the years, also authorized the listing of some companies with mainly foreign operations on the Official Market. There has been the listing of foreign exchange traded funds (ETFs) and these have generally been welcomed by investors. However, the experience has not always been good for investors who chose to invest directly in shares of some other listed companies.