Posted by Joshua on Thursday, March 26th, 2009
SYRIA’S BOURSE – THE LAUNCH & RECOMMENDATIONS FOR ENHANCED MARKET LIQUIDITY
BY Ehsani2 (who works for a global financial institution in the area of bonds and derivatives)
For Syria Comment, March 26, 2009
Syria launched its stock exchange last week after years of delays in the latest step to liberalize the country’s largely state-controlled economy. The first step toward creating a legal framework for the exchange was taken in June 2005 with the promulgation of law No. 22 following the Presidential order to establish the “Syrian Commission of Financial Markets and Securities.” The second step was made on September 2006 with the announcement of Decree No. 55, known as the “Damascus Securities Exchange Law.” In July 2008, Decree No 36 amended previous laws to facilitate limited liability companies and local banks in offering general financial services.
Between June 2008 and January 2009, the DSE formalized and announced a number of regulatory resolutions covering items such as the code of conduct, market fees, and listing and trading rules.
The delay in the DSE launch can be blamed in part to the U.S. economic sanctions imposed on Syria which bedeviled efforts by officials to secure the computer system to run the exchange. Most platforms use U.S. technology which is proscribed by the US government. The Syrian government must also bear some blame for the delay, however. Not until the summer of 2008 was the legal framework established to support the exchange.
While delays were frustrating to some, most Syrians have grown accustomed to the slow and awkward crab walk that characterizes their government’s approach to policy formulation. Launching a securities exchange has required a revolution in economic thinking. For bureaucrats brought up within the strictures of Syria’s centrally planned economy, opening a securities exchange is an act of self-reinvention. The new laws and regulations have had to be tailored to work within a largely outdated legal and regulatory system. Even so, the revolution is not complete as the directors of the exchange insist that it will promote investment and not speculation.
On the first day of trading, March 10, 2009, only six companies were listed and only one traded. The total volume traded was 15 shares at an average price of SYP 1050 per share for a total value of SYP 15,750 or USD 342.
On the second day of trading, March 16, again, only one company traded (same company). The total volume traded this time was 25 shares in 2 trades at an average price of SYP 950 for a total value of SYP 23,750 or USD 516.
On the third day of trading, March 19, the shares of two more companies traded. A total of 5 trades took place. The volume traded grew to 1407 shares with a total market value of SYP 476,139 or USD 10,351.
On March 23, the volume of shares traded dropped back to only 2. The number of shares traded also dropped back to 800 shares while the value amounted to SYP 159,000 or USD 3457.
On March 26, the fifth day of trading, the number of shares traded was 129 shares for a total value of SYP 29,250 or USD 636.
Bank Audi Indices:
On March 17th, Bank Audi Syria announced that it would create its own “Audi Indices for DSE”. The various indices would help market participants track the activity of the market in terms of size, prices and trading volumes.
According to the bank and by the close of business on March 23rd, the market capitalization of all six listed companies was at SYP 18,588,750,000 or USD 404 million.
Why the lack of market volume?
While one can take comfort from the fact that the market is finally up and running, it is clear that the trading volumes are extremely disappointing.
There are several reasons for this severe lack of liquidity. While there are between 7500 and 10,000 shareholders who can potentially sell their shares to willing new buyers, there are reportedly less than 100 accounts open to date. In order to trade on the DSE, an individual has to open an account at one of the five approved financial brokers.
The other reason for the lack of liquidity concerns two particular aspects of the trading rules of the DSE as announced on January 7th of 2009. Section 24 of rule No 231 (trading rules) stipulates that a broker cannot sell a security on the same day of purchase. Section 25 of the same rule stipulates that the price change of a security one any one day cannot exceed a certain percentage both on the way up as well as down. While this percentage was not fixed by the ruling itself, DSE has announced that this percentage is currently pegged at 2%.
The main government agency in charge of regulating the DSE is the Syrian Commission on Financial markets & securities. The Commission’s main stated mission is “to establish a fair market with a high standard of transparency, efficiency and depth”.
In its zeal to protect investors, the commission seems to have concluded that both sections 24 and 25 above are an essential part of its attempt to protect against volatile movements in daily security prices.
While this is understandable, the side effect of these measures has been a severe lack of liquidity and a lack of market depth that is supposedly part of the commission’s mission.
For the DSE to enjoy higher trading volumes and liquidity, the commission must revise its 2% daily price movement limit by raising it to 10.0% and it must also allow investors to buy and sell on the same day. The notion that waiting one day to sell a security turns a “trader” into an “investor” is not credible.
On March 23rd, Nadim Issa of Bloomberg News reported how the bourse struggled to attract volume as investors shun transactions because of the 2% limit on share movement. It was argued that this limit is impeding trading as the high volume of buy orders meant that prices had to move beyond the 2% limit to draw the sellers who refused to sell their shares 2% higher than the previous day’s close.
“There were a lot of buy orders but not enough sell orders on the other five companies,” said Omar Ghraoui, chief operating officer at Damascus-based Bemo Saudi Fransi Finance SA, the brokerage unit of Banque Bemo Saudi Fransi SA. The fluctuation limit is impeding trading and the brokerages are hoping the bourse will change the regulation, he added…. “We had many shareholders from Banque Bemo who were willing to buy Bemo’s shares but no one wanted to sell,” Ghraoui said.
The reason that many want to buy but none will sell is the 2% limit. Everyone believes that the Bemo shares are worth more than yesterday’s closing price plus 2% so they hold on to it. Let us suppose that new information causes the stock owner to believe that his stock is worth 10% more than yesterday’s closing price, he will refuse to sell until the market advances by 10%. This would take four trading days if it rises by 2% each day. But if no one is willing to sell stock, the market will not register a trade and the stock will become frozen at its low price. Broker’s will have to engineer a price rise by selling a single stock to a friend in an arranged transaction in order to get the market to move. In theory the market will constantly be running after a “true” price but rarely reaching it because “speculation” is prohibited. Markets are speculative by nature. Forbidding a price movement greater than 2% will lead to a frozen market, as we have seen happen in the first week of trading. Fortunately this problem is easy to solve by lifting the fluctuation limit.
The 2% daily price limit means that a stock worth close to USD 20.0 cannot go up or down by more than 50 cents a day. Since brokerage is set by the DSE at a range of 0.0034-0.0054 of market price, one expects to pay around 8 cents in brokerage alone. The market cannot possibly function with such a constraint if for no other reason than that the six brokerage companies will struggle to stay in business for long given the exceedingly low trading volumes. Also, there is no tax on profits made in the market.
Of the six companies that decided to list on the DSE, four are banking institutions. The other two are in the fields of transportation (Hama based) and publishing (Damascus based).
The latest financial disclosures of these companies will be announced in April. Based on preliminary data, the six institutions seem to have earned a combined after tax profit total of close to USD 37 million. The four banks make up nearly 96% of this total. Both the publishing and transportation companies combined seem to have earned less than $2.5 million. Given that the six companies have a market capitalization of $404 million, the current price to earnings ratio for the total market is near 11.20. This is attractive.
A number of the banks that dominate the market capitalization are enjoying healthy growth in earnings. In order to ascertain whether the current share prices are attractive one needs to calculate a forward price earnings ratio. Given the trajectory of the earnings, it is clear that on a forward basis, the price multiple is well below the 11.3 level. Were profits to rise by 20%, the forward P/E ratio drops to around 9.3 at the current share prices. The market is rather under priced and presents a buying opportunity.
While it is difficult to know the precise order book to ascertain the number of buyers and sellers at these prices, it is safe to assume that there are many more buyers than sellers. The 2% price limit has brought the market to a standstill.
Addendum: It is worth noting the volume of other regional stock markets:
- Lebanon trades around 100,000 shares a day
- Egypt between 50 and 100 million
- Qatar’s average is 10 million
- Jordan = 30 million.
- Saudi and UAE = 300 million each
- GCC Region – the top 200 companies trade between 500 million and one billion shares
- Iran = 50 million
- Israel = 150 million
- The U.S. Trades an average of 1.5 billion a day in the S&P 500 and another 800 million on Nasdaq
The DSE and its regulators must take several urgent steps to improve market liquidity and encourage more public listings. The daily price limit of 2% must be increased immediately. Buying and selling on the same day must also be allowed. The DSE board must be given more authority to make recommendations and make changes as market conditions warrant. Large family owned businesses have yet to list on the exchange, which is a considerable weakness, given that most Syrian businesses are family owned. A committee should be formed to look for ways to accelerate this process. Tax laws are likely to blame for the low participation of this sector. Finally, procedures for opening accounts and encouraging public participation must be streamlined. Something is not working if less than 100 accounts have been opened to date.
addendum: See this NYTImes article by Robert Worth on the Stock Market – Syria Finds Right Ingredients to Start a Stock Market From Scratch