The Botswana Stock Exchange continues to display an outstanding performance with the 2007 Annual Report impressive and significant.
It is the replica of the previous report which the institution maintains “was a spectacular year for the BSE”.
Released recently, the report acknowledges and compares the conspicuous performance of the two reports.
“As noted in the previous Annual Report, the year 2006 was a spectacular year for the BSE. The year 2007 likewise saw market turnover and liquidity increasing by 100 percent and 61 percent respectively,” notes the report.
Reviewed by the chief executive officer, Hiran Mendis, the report adds: “Whilst the average daily turnover increased from P1,7 million to P3,4 million, the number of shares traded increased from 87,2 million in 2006 to 124,6 million in 2007, registering a growth of 42,9 percent. There is no doubt that the excellent returns in 2006 translated into interest in the market from investors resulting in the impressive performance.”
That notwithstanding, the Main Board closed the year at 8,421 points, appreciating by only 36 percent in comparison to a growth of over 74 percent in 2006.
Mendis attributes the decline to a correction in market prices which commenced from the third Quarter of 2007.
“More importantly the Board appreciated by 25, 8 percent and 23, 3 percent in Quarters 1 and 2 respectively. The index began losing momentum in Quarter 3 and declined by 13, 7 percent in Quarter 4”, he revealed, adding that “the Board reached its highest ever level of 9,879.4 on 31st July 2007”.
As for the Foreign Company Index, the chief executive officer paints a considerable growth of 24 percent in the year under review compared to 78 percent and 57 percent in 2005 and 2006, respectively.
Similarly, the All Company Index grew by 24, 4 percent in 2007 in comparison to 58 percent in 2006 and nearly 75 percent in 2005.
“Although the decline in the price indices coincided with the general decline in stock market indices around the world, the reasons for the decline in prices in the Botswana market was in no way related to the “sub-prime” crisis and the recession in the United States resulting in a contagion effect in many markets,” admits Mendis.
To substantiate his statement, he asserts that “the value of anything can be determined by what someone else will pay for it,” adding, “in fact, this is the basis for price discovery in all markets”.
“However, how efficient the process of discovery is depends on liquidity,” he said. “In markets where liquidity is low, price discovery is bound to be inefficient and a downward correction in market prices tends to be sticky.”
“In the case of Botswana, this problem is further exacerbated by the fact that 30 percent of pension fund collections have to be invested in local assets which are in short supply.”
In this context the price correction which took place in the second half of 2007 cannot be considered to be a negative development since it helped to align market prices with value.
The report embraces the market Price per Earning, which was 16.3x as at the end of 2006 and further increased during the year to 21.9x as at the end of Quarter 2 only to decline during the second half of the year to close to 15.6x as at the end of 2007.
Another positive development that emerged during 2007 was the significant gain in BSE’s market capitalization.
While the domestic market capitalization increased significantly from P23,8 billion in December 2006 to P32,7 billion as at the end of December 2007 growing by 37,4 percent, the foreign company market capitalization also swelled (though insignificantly) from P510,4 billion in 2006 to P535,3 billion in December 2007, appreciating by 4,9 percent.
Cautions the report: “If the stock market is to act as a catalyst to spur economic growth, it has to contribute to capital in the economy and act as a barometer of economic health. The effectiveness of the market in doing so would depend on the extent the stock market could contribute to channeling to investments through Initial Public Offering and Rights Issues and its sensitivity to economic and corporate information.”
Mendis regrets most listings on the BSE have taken place through introductions and not through IPOs.
Further, liquidity and structural issues have reduced the sensitivity of the market and other information.
However, Mendis takes solace in the premise there has been a significant improvement in the liquidity of the market as evidenced by the ratio of turnover to domestic market capitalization.
“This ratio increased from 1, 8 percent in 2006 to 2, and 9 percent in 2007. Further, average daily turnover increased from P1, 7 million per day to P3, 4 million.”
An analysis of the dispersion of turnover, he says, indicates the coefficient of variation of average daily turnover has reduced progressively over the past years.
Mendis allayed fears, thus: “This signals a welcome development even thorough admittedly the base values are too low to make any conclusions with acceptable degree of confidence.”
Although there were 26 bonds listed on the BSE in 2007, the report decries the debt market remains inactive as in previous years.
The value of debt securities traded in 2007 was P196, 8 million and the debt market capitalization declined from P4, 1 billion as at the end of 2006 to P3, 8 billion as at end of 2007.