In an interview with Neeraj Umanee, Manager at Swan Securities Ltd, we explore the intricate dynamics of the stock exchange in Mauritius. As we navigate the recent fluctuations and trends within the market, Umanee provides valuable insights into the challenges faced by listed companies, the impact of interest rates on investment decisions, and the evolving landscape for foreign investors.
Featured in Investor’s Mag, 26th Edition, Oct – Dec 23
What’s your assessment of the current status of the stock exchange in Mauritius?
After the severe drop of 24.3% witnessed in our market’s main Index in 2020, the Mauritian witnessed a broad-based recovery in 2021 as SEMDEX ended the year in positive territory, up by 27.3%. Last year however, companies witnessed a deterioration in the operating environment as the Russo-Ukrainian war along with resulting geopolitical consequences led to a surge in volatility of commodity prices. This impacted companies in two ways: Firstly, companies had to deal with rising cost of operations, and depending upon their ability to readjust pricing accordingly, some witnessed margin compression.
This was the case for property and insurance companies whose top line is highly dependent on inflation expectations. The subsequent increases in interest rates by central banks around the world to counter price pressures was also not conducive for the stock market. On the currency front, the strength of the US Dollar along with the surge in yields on short term US treasuries, left little room for upside on our domestic market in 2022. As a result, we saw the SEMDEX drop 2.03% in 2022, despite improving profitability across the board.
In 2023, although the operating environment has improved locally, with improved visibility on inflation trajectory with a revised forecast by the Bank of Mauritius of 6.8% in 2023. Profitability of listed companies have also improved compared to the last two years, however high interest rates and remaining risks to the outlook still weigh on investor sentiment. This has been reflected in our market Price to Earnings ratio (P/E), which remains below its long-term average of 12-13x. Extrapolating on financial results released by listed companies at the end of March 2023, market P/E was estimated to around 6x on a trailing basis – below its long-term average.
Could you provide insights into the prevailing investment trends within the market?
In August, SEMDEX performance turned positive for the first time since the beginning of the year and stood at 1.30%. This performance was mainly driven by the rally in hotel stocks, which were up 31.9% (NMH), 29.5% (SUN) and 21.6% (LUX) on a year-to-date basis, respectively. Improved profitability, along with cash flow generated led to the declaration of dividends from the three groups*, the first since 2019, and a positive signal sent to the market, reflecting the improved financial health of these companies.
Among conglomerates, while profitability of their respective hospitality clusters resulted in improved profitability, performance was contrasted. As Ciel and Rogers were up by 14.5% and 11.9% respectively, ENL and IBL were down 14.20% and 13.4%. Investors are also monitoring the performance of Banks and Sugar Conglomerates who are both benefiting from favorable tailwinds. On the banking front, both MCB Group and SBM Holdings are expected to post record profits for their respective financial year, boosted by improved yields as their assets start to reprice at current prevailing interest rates. On the sugar side, companies are all expecting better remuneration per ton of sugar this crop year. Ability of each player to contain their costs of production will also be monitored by the market.
*Sun Ltd and LUX Resorts declared ordinary share dividends whilst NMH Ltd reinstated the payment of preference share dividends
The surge of over MUR 380 million in foreign investment on the Mauritius Stock Exchange from January to July this year is remarkable. What factors, in your opinion, have contributed to this increase? Furthermore, do you anticipate the continuation of this trend?
Foreigners were indeed net buyers of local stocks in the first half of the year, with significant buying interest centered around the banking cluster. As previously mentioned, the current valuation levels are suggesting that there could be an interesting upside down the road as the widening gap between fundamentals and market performance finally close. In addition, from a regional perspective, Mauritius witnessed lower levels of inflation compared to other frontier markets. Ghana for example recorded a headline inflation of 54.1% as at December 2022.
Egypt recorded a headline inflation of 24.4% in December 2022 and Nigeria recorded a headline inflation of 21.34% as at December 2022. From a currency perspective, the rupee has also been relatively stable since the intervention of the Central Bank on the local forex market in April to put an end to speculation on the local currency. Since then, selling rate on the USD/MUR pair was seen trading in the Rs 45.00 – 46.00 range, with the bank intervening as and when it goes above Rs 46.00.
More recently however, we are starting to see some foreign outflows on local equities as suggested by foreign transactions data for the month of August – as renewed upside on US treasuries continues to create competition for other asset classes.
Foreigners were indeed net buyers of local stocks in the first half of the year, with significant buying interest centered around the banking cluster…
Neeraj Umanee | Manager | Swan Securities Ltd
To what extent have the upward shifts in interest rates impacted the Stock Exchange of Mauritius?
As previously mentioned, higher interest rates make equities less attractive to the investor, especially when uncertainty regarding the economic trajectory is high as it creates a risk off environment. Central banks start to harden their tone and management comments in financial statements are starting to sound less optimistic. This in turn- will lead to capital flying away from risky assets (equities) towards safer alternatives in a trusted currency, this is why the US treasuries along with commodities such as Gold are attractive in times of turmoil. The switch back from the risk-off environment to a risk-on environment will ultimately result from the level of perceived risk in the economy and whether riskier assets are adequately compensating investors for that risk. Right now, investors could get a 1-year US treasury bill and would earn a yield of 5.42%, without taking any risk.
From a fundamental perspective, higher interest rates are also synonymous with lower valuation levels due to a higher denominator. In the context of our local market, while the denominator has indeed increased, the numerator has also improved as companies’ cash flow generating ability progressed in the past quarters. Moreover, banking groups tend to generate more net interest income in periods of high interest rates and we have seen the good health of the banking sector through the reported earnings of the listed banking groups.
What are your anticipations regarding the stock market’s performance over the upcoming year?
The Mauritian stock market is yet to reflect the financial performance of its main constituents – there is a disconnect between growing earnings of listed companies and the relatively flat share price performance. We believe that the current state of the Mauritian stock market creates interesting opportunities for the long-term investor looking for value buys.
In the short run however, much of what will happen will be tied to the path of interest rates. The good news is that given the encouraging inflation data being released around the world, there is a consensus that we should be nearing the end of the tightening cycle. However, following central banks guidance of rate remaining “higher for longer”, we may have to wait until 2024 to witness any cut in interest rates. At which point, we could expect an improvement in market prices.