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Overview: Investing on the Malawi Stock Exchange

Addmore T. Chakurira, an analyst at Stockbrokers Malawi, gives an overview of the Malawi Stock Exchange (MSE)

The MSE is small by both regional and international comparatives, capitalised at a mere US$1.5 billion with only 14 domestic companies listed. Thus there is limited depth and diversity. Furthermore, the market is illiquid with daily average value trades averaging approximately $62,000.

The domestic market is dominated by three entities, namely Illovo capitalised at $520.4 million, National Bank of Malawi (NBM) at $181.3 million and Press Corporation at $127.6 million. The three companies have a combined market capitalisation of $829.3 million (62.3% of the total market).

Excluding Old Mutual, the market capitalisation to GDP is approximately 33%. To 30 June 2010, the domestic market capitalisation was down 9% to $1.34 billion on value traded of $8 million versus $10.2 million for the same period last year.

There are currently three indices on the MSE – the Domestic Index with 14 companies, the All Share Index comprising of 15 companies and the Foreign Share Index with one company – Old Mutual. The indices are calculated using a 1996 base date and are weighted as per market capitalisation.

Trading on the MSE

Presently, trading is by call over, using an open‐cry floor system on a matched bargain basis. This trading system is paper based and settlement is on a T+7 basis against physical delivery of scrip (seven day settlement for both shares and payment).

Share dealing is done through stockbrokers once a day, from Monday to Friday. The call over session commences at 1000 hours. The financial instruments traded on the MSE are common stock, preference shares, corporate debentures, warrants, government stocks and fixed‐interest securities. However, the bulk of trades and listings on the exchange are for common stock.

In the last 12 months to 31 December 2009, the MSE turned over MWK2.8 billion ($18.7 million) in value or 78% of total market capitalisation. Given the size of the market, patience is generally required to build a position and equally when fund managers want to sell. The market is characterised by high levels of local institutional investors who are relatively inactive, compounding the liquidity problem.

Foreign Participation and Regulation

Fungibility is permitted for the only dually listed entity, Old Mutual.

MSE Outlook

MSE counter prices remain depressed and as a result offer excellent investment opportunities, especially in the event that interest rates decline meaningfully. Market overhangs (largely a result of foreigners failing to exit on account of foreign exchange shortages), which affect some counters currently could be expected to work out fairly quickly on a rekindling of market interest.

The Reserve Bank of Malawi (RBM) slashed the bank rate to 13% from 15% with effect from 1 August. TB yields have eased with the 273 day TB yield now at 12.21% from 13.53% in July 2010. With a few exceptions, ratings remain attractive in relation to listed African peers.

For Malawi investors, the current Old Mutual price presents an arbitrage opportunity as the MSE price is at a 16% discount to the JSE price (excluding transaction costs). With fungibility, Old Mutual remains a BUY on the MSE until at least the arbitrage has narrowed. Investors can move Old Mutual shares from the MSE for onward sell on the JSE and reinvest the proceeds in other counters that offer significant upside.

Dividend yields are generally expected to remain strong, although some of the stronger performing companies, especially in the banking sector, could benefit their shareholders better through the distribution of higher rates of dividends.

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