The financial industry will remember 2013 as the year fraudulent “investment” schemes were unmasked at the expense of the unsophisticated investor. In its aftermath, local regulatory authorities hosted a delegation from the United States Securities and Exchange Commission (SEC) for a ‘Training Programme on Effective Oversight of Capital Markets’ last August. Mr. Z. Scott Birdwell, of the SEC, pointed out that it is impossible to prevent public companies from cooking their books (think ‘Enron’) and Ponzi schemes (think ‘Madoff’).

However, enforcement intensity lowers the cost of capital which in turn makes capital markets more attractive thereby fuelling its growth. In his opinion, the extent to which regulators enforce the law is directly proportional to market growth. The most significant market event of 2013 was, in my opinion, the expansion of Stock Exchange of Mauritius (SEM) security offerings; not its ascent to record highs. The introduction of Exchange Traded Funds (ETF), the sudden craze for fixed income instruments, and admission of Global Business Category 1 Licensees (GBL) boosted Total Market Turnover (TMT) by over Rs 350 M. If Mr. Birdwell’s observations are correct; then, given the extent of the local bourse’s growth last year, one is in a position to conclude that regulatory enforcement and surveillance are at optimal levels in our burgeoning frontier market.

The domestic market not only welcomed new stocks (both local and GBLs) in 2013, but also witnessed the introduction of ETFs as a new asset class in the local regulation and the admission of fixed income securities. The former as its name suggests is a fund, i.e. a managed collective investment which is designed to replicate the performance of its underlying basket (ranges across the entire gamut of things that can trade on an exchange); while the latter as its name suggests provides a periodical fixed return (ranges from sovereign bonds to private debt instruments). In addition to the above, resource exploration companies have expressed keen interest in leveraging Mauritius as a platform to raise capital to finance their prospecting endeavours on the African continent. Lowering trading fees has also been part of the equation: the SEM reduced fees on short term trades (≤ T+2 days) to 0.15% per leg for trades above Rs50k with a view to increase volume through speculators. However, without a mechanism for securities lending, it is not possible to conduct reverse short term trades (dubbed as ‘turnaround’ trades) unless one already owns the stock.

ABSA Capital, a member of the Barclays group, introduced NewGold ETF (NGLD) which is a security (~ 0.01oz t) designed to track market prices of gold whose primary listing is on the Johannesburg Stock Exchange (JSE). NGLD is physically backed by gold which is gathering dust in a vault in London. NGLD is also the first instrument to have a market maker thus making it the most liquid listed instrument on the SEM. Yes! It is more liquid than even MCB, because ABSA will provide liquidity at all times, i.e. ABSA will always provide any required volume at a buy and a sell price to investors based on the world market price at that point of time. ETFs have yet to garner traction with local investors which either do not fully understand the instrument and/or do not believe in gold. As this is the first security to have a market maker (MM), there appears to be a confusion on how to trade: placing a bid at price lower than the MM is unlikely to be matched because the MM pays a better price; while an offer at a price higher than the MM is unlikely to be matched because the buyer can buy it cheaper. MM prices thus offer the lower and upper bound prices for the ETF. NewPlat ETF (NPLT), an ABSA Capital instrument (~ 0.01oz t) designed to track spot prices of platinum, with AXYS Stockbroking Ltd continuing its role as lead broker, has joined the SEM this year. NPLT like NGLD will be backed by physical platinum stored in a London vault. We trust that as sophistication increases on the bourse, investors will too and ETFs gather increasing momenta in 2014 and beyond.

The biggest growth story was that of the renaissance of the bond market. In 2011, then-troubled LUX was unable to raise Rs 500 M at 9%, in stark contrast CIM, ALTEO, NMHL (Beachcomber) and MCB raised Rs 7.5 bn between May-13 and July-13. UBP and SBM have raised another Rs 2 bn since. It was OMNI however which kick-started the process in 2012 with is 5-year ‘note programme’. The issue of corporate bonds is a cheaper method of borrowing money for companies since the coupons (names thusly because in the earlier 20th century one turned in a coupon in exchange for payment) are below Prime Lending Rates. From the subscriber’s point of view, a debenture (aka bond) offers higher return than a typical bank savings or term (fixed) deposit account. However, the risks involved are greater. The greater the risk, the higher the interest rate at which the company borrows from the market. The relative ease with which close to Rs 10 bn were raised is a testament to the market’s quest for yields in a low interest environment, and excess liquidity on the market. From a trading perspective, because bonds are acquired for the purpose of receiving steady and predictable returns, they are by their nature inherently less liquid than equities. That said, the SEM lowered trading fees on the debt market to 0.1% for trades in excess of Rs 75k should spur more exchanges. Yet, the local investor – it seems – has grappled with the shift from thinking in terms of ‘price’ to ‘yield’; a situation which becomes even more confusing due to the existence of both ‘clean’ and ‘dirty’ prices.

The class of securities which will take the typical Mauritian investor completely out of this comfort zone however, will be resource exploration companies. These have a unique risk profile which will be a function of area being explored, the type of resource being sought, the use of the said mineral by man, and the exploration stage reached. One could either strike gold – in some cases literally – or nothing.

Looking forward into 2014, we can see that the Mauritian market gains sophistication as it expands and diversifies. Think not solely in terms of company XYZ anymore, but think also in terms of precious metals (gold & platinum) and yields (through bonds). Of course, no one knows how a given security will perform, but know that the SEM is now much more than just stocks, it is also about precious metals and bonds! That said, it is crucial to understand where and how one is investing, so ask your broker or even the SEM which has an investor outreach programme. The local bourse has re-coupled with overseas trends and has performed in tandem with the bull developed markets; and gold has also been on the rise after a steep drop in 2013.

Although we cannot know for how long the present run will extend for, market sentiment has been generally positive. In terms of yields, floating rate bonds provide a hedge against the interest rate moves the Central Bank and Ministry of Finance have been sparring about.

Business Year Book, special issue of Business Magazine (March 2014)