A nation of shareowners may sound like a terribly capitalist notion for government intent on democratising the economy but on more careful thought this might represent a perfect example where the end justifies the means
The Stock Exchange of Mauritius (SEM) celebrated its 25th anniversary last week. Starting very modestly, the Exchange has been constantly growing in terms of the number of companies listed and volume of transactions. In the recent past there has been a marked shift in strategic orientation, leading to a qualitative transformation of the institution through a deepening and widening of its scope in an effort to bring it more in line with the needs of the country’s status as a regional financial centre.
Over this quarter of a century the size of the market has grown from a market capitalization to GDP ratio of less than 4% in 1989 to the current ratio of more than 80%. New financial products have been introduced while the Exchange has increased its international/regional reach. According to Chief Executive Sunil Benimadhu, “since 2010 the SEM is going through a strategic reorientation of its activities and gradually moving from equity based domestic Exchange to a multi-product internationally oriented one…”
Basically Stock Exchanges are set up in developing countries with a view to improving the allocation of resources and on the premise that making optimum use of available domestic financial resources is important for economic development. The Stock Exchanges mobilize resources from the general public as well as institutional investors such as pension funds, mutual funds and insurance companies. Theoretically these funds are directed to firms where they are most optimally utilized through the intermediation of the Exchange. Of course all this is premised on the understanding that the Exchange is efficient.
In developing countries where the setting up of Stock Exchanges is often dictated by political motives – democratisation of the economy/ownership – as much as economic concerns, the measures of efficiency will often include criteria such as before and after, levels and direction of capital flows, wealth distribution or simply levels of mobilization of local resources over a period of time. It is always difficult to reach definite conclusions in such situations for two main reasons. Firstly, there are many factors in the environment, which are beyond the scope of the Exchange, which tend to influence these variables. Secondly, it is always going to be anybody’s guess how much worse or better it could have been in the absence of an Exchange.
Extreme cases of inefficiency would however be more perceptible if, over time, one group of investors was consistently gaining at the expense of another. In this connection, it would be fair comment to state that in the early stages of the Port Louis Stock Exchange there was some poor experience regarding the underperformance of a few of the big ticket companies which witnessed considerable drops from their initial listing prices after a very short period of time. That this occurred at a phase in the learning curve, which led many of the investors to conclude that the Stock Exchange did not offer a “fair game”, is probably one of the most underestimated causes of the subsequent difficulties of getting more retail investors including pensioners to invest their savings in listed equities.
On the supply side, a market is said to be efficient in all respects when it is not possible for any single or restricted group of investors to take advantage of knowledge which is only available to them (regarding the economy, an industry or a company) in order to systematically benefit from the market. Such instances of “insider trading” or even a perception that this may occur can be a serious handicap especially in a small island economy like Mauritius.
To guard against these risks, the textbook requirements are for a market to be governed by stringent disclosure requirements, control of insider trading, an active reasonably sized market, no discontinuities in trading and a good communication system. It must be said to the credit of the Stock Exchange of Mauritius that all these criteria have been actively promoted during its relatively short history. While this is a necessary condition for the development of an active capital market, the Stock Exchange will not attain its twin political objectives of allowing the participation of larger and larger numbers of individuals in the growth story of the national economy even as it serves its primary purpose of an efficient financial intermediation.
There is also a need for government to be committed to create a supportive social, legal and political environment. In this regard there is general agreement that, although it needs to be constantly monitored, our basic legal framework meets international standards and has stood the test of time. The economic growth of the country over the past quarter century has provided the kind of favourable socio-economic environment in which a Stock Exchange should thrive.
As explained above, meritorious efforts have been undertaken by the SEM to improve its operations. Where there is obvious room for improvement is in consolidation of the general eco-system in which the institution operates. The general consensus on this count seems to be that, in spite of its obvious successes, there is more to be done in terms of increasing the participation of retail investors in the market. One of the metrics of success would be achieved when the common folk start giving consideration to investment on the Stock Exchange as at least a partial alternative to savings or fixed deposits in banks. A concerted and focussed effort by all the stakeholders, including investment analysts, the media and the brokers in educating the latter about the real risk and reward factors may be called for.
Finally on the political front government could certainly provide a real boost to its economic democratisation drive by adopting a policy of at least partial disinvestment of some of the state controlled enterprises. The usual objection to this proposition is that this would only result in the consolidation of the large family controlled corporates over even more sectors (often natural monopolies) of the economy. While this is undoubtedly a real risk, the experience of many countries and the strength of our local institutions can be leveraged to fairly easily circumvent it.
A nation of shareowners may sound like a terribly capitalist notion for government intent on democratising the economy but on more careful thought this might represent a perfect example where the end justifies the means.
* Published in print edition on 25 July 2014