By Dr.Jim Leontiades
Cyprus International Institute of Management
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It was not so long ago (last September) that I wrote an article about the “Summer Doldrums” of the CSE. After an upward surge during the Spring, there followed months of relative inactivity in share prices. The CSE appeared to be asleep. Things have certainly changed. The CSE Index has advanced so rapidly since that time (over 85%) that some now see the spectre of another bubble, all of which testifies to the volatile nature of investment sentiment in
Certainly the pace of recent share price advances are in the “bubble” category. However the actual level of share prices is something else. At least at the time of this writing – share prices (price earning ratios) cannot be compared to those reached during the 2000 bubble. In part, the recent advance appears to making up for lost ground and the lack of share price movement in the Spring. At that time the announcement of better than expected year end earnings only brought a collective yawn from investors. There was little upward movement. In fact, many prices actually declined even after the announcement of larger than expected profits. Some part of the recent advance also reflects anticipation of exceptionally good third quarter profits in November. We may expect a short term decline if these expectations are not met.
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The Longer Term
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As for the longer term, there has clearly been an upward movement in share prices which seems likely to continue well into the next year.
What is behind this favourable trend? Firstly, it is clear that there was an overreaction to the collapse of the stock market bubble. Evidence to this effect is visible in the eagerness with which some Cypriot companies have been acquired by foreigners, particularly Greeks.
Foreign banks, UBS and others, have made it perfectly clear that they too consider that CSE prices were too low. They backed up their more optimistic outlook with large purchases of Cypriot shares, particularly those of the Bank of Cyprus. The same perception has driven a good number of companies listed in the CSE to purchase their own shares. Clearly the management of these firms, which is in the best position to know, considers their own shares to be a good investment, i.e. under priced by the market. Some of these firms have paid dividends for 2005 which exceeds the interest available from the same sum deposited in a local bank.
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Mergers and Acquisitions
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Mergers and acquisitions, actual and rumoured, have also made a contribution to the positive trend. Assuming the Laiki/Egnatia/Marfin amalgamation goes ahead, it will signal a major repositioning within the banking industry which other players, both in Greece and Cyprus, will find hard to ignore. They will have to respond, some of them with their own acquisitions. Such restructuring typically has a positive influence on share prices.
The prospect of the common platform with the
All this has made for renewed interest in the CSE, even from those who had declared it dead. Daily CSE volume has increased some 20-30 times from the levels seen last summer. Is this too much? Not really, during the peak of the upswing toward the beginning of the year 2000 trade volume occasionally reached 50 million. However, a word of caution. The exceptional pace of the recent advance in share prices indicates that the sort of “irrational exuberance” behind the last bubble is only dormant, not dead.
