DR. JIM LEONTIADES
Cyprus International Institute of Management
Â
The Financial Times finds there is much to praise in the performance of the German stock market. The newspaper points out that in 2007 the rise in Germany’s index of share prices “outshone all its “major rivals”, having risen by 22%. Of course, Cyprus is not considered a major rival to Germany but the fact remains that share prices in Cyprus did even better.
Here in Cyprus share prices last year increased by 24% but in contrast to the euphoria expressed over Germany’s 22%, the gain here was met here by gloom and doom.
A recent CFA/Financial Mirror survey of financial experts in Cyprus reported that for the forthcoming year, the great majority preferred to invest abroad. The most favoured locations were the developed markets in Europe, certainly including Germany. Other developed markets in Europe which performed less well than Germany include the UK, a country with a weak share price performance in 2007 (less than 3% rise in the FTSE index), declining retail sales and with major economic problems due to the infamous sub-prime crisis. Even the USA which is on the verge of a recession was rated by the experts as a preferred location compared to Cyprus.
The USA share price increase in 2007 (7% and dropping in 2008) also does not include the losses due to the depreciation of the dollar. None of this was able to persuade the experts to favour investment in Cyprus.
Â
— Economic Outlook
Â
Of course, investment preferences have to do with future performance. While the outlook for economies and financial markets worldwide are distinctly unpromising for the near future, all such things are relative. The future economic outlook and forecasts for the countries mentioned above are below those of Cyprus.
In the recent past Germany was one of the worst performers, occasionally referred to as the “sick man of Europe”. The German economy as measured by GDP grew in some of the last few years at less than 1%. Although last year German GDP grew at close to 3% GDP for the first three quarters, will this last? Economists are anything but positive on this point. GDP growth there declined closer to 2.5% in the final quarter of the year.
A respected indicator has recently reported a drop in the German business climate and a much larger than foreseen decline in measures of the current business situation. For the Eurozone as a whole, economic growth is projected at 2% in 2008.
Â
— The Outlook for
Â
Economic growth in Cyprus for 2008 is forecast at between 3.8 and 4%, higher than any of the major European developed countries.
Economic institutions such as Moody’s and the Economist Intelligence Unit rate the Cyprus economy favourably for 2008. Foreign banks, such as DB and USB, have been consistently optimistic as regards the future share price of the major Cypriot banks. Companies here have been reaping record profits and issuing positive profit warnings. Dividends have been rising and interest rates falling.
Unlike local investors, foreigners have shown confidence in XAK companies in the most convincing way possible, by buying them. As we pointed out earlier in the previous year, the aversion of Cypriot investors to Cypriot company shares creates opportunities for foreigners to acquire local companies. That is exactly what has happened, with Greek investors playing a dominant role in the record breaking merger and acquisition of Cypriot firms in 2007. Numerous Cypriot companies are also buying their own shares, another sign of undervaluation.
Â
— What is the Reason?
Â
So why are Cypriot investors fleeing? Cyprus is not faring worse than other countries and in many respects it is doing better. Nevertheless, investment professionals remain reluctant to invest through the XAK, a “thin market†with high volatility and an ambiguous and often negative regulatory environment. Companies and individual investors here are accused of fraud and nothing is seen to be done. The scandal over the millions which the EAC lost due to Suphire is a rare exception. After much delay, a sentence was eventually passed on those responsible for the blatant loss of several million pounds from the Electricity Authority pension fund (no doubt to be made up by customers and tax payers).
In short there is a lack of confidence in the XAK which may not be warranted by the performance of the
Â
— A
Â
The investment plans of Cypriot analysts outlined above should serve as a “reality check” on the much touted plans for making Cyprus a regional investment center.
This has proved to be an exercise in self delusion, as are the similar claims of developing this island into an education center, a regional health centre, etc., etc. Becoming a leader in the region takes more than just declarations and wishful thinking. Perhaps we are so preoccupied with the “Kypriako” problem that there is not sufficient time and energy left for the sort of effort this requires. If so, this represents a substantial cost which will become ever more obvious as real regional centers develop in countries which were once considered far behind Cyprus.
