BSE needs an overhaul - study

Brian Benza
Staff Writer | Friday September 10, 2010 00:00

According to research conducted by Bank of Botswana analysts who used the time series analysis to gauge the efficiency of the BSE, the bourse's returns on the mainstream Domestic Companies Index (DCI) follow a long memory process, which stands against the precepts of the efficient market hypothesis.

The DCI measures the performance of the counters on the domestic board. The research also showed that the DCI trends are not easily predictable on the basis of past volatility, making it difficult for analysts to come up with forecasts and chart analysis.

'The research shows that the behaviour of the equity market returns and risks are dissimilar and this may have implications for portfolio diversification and risk management strategies.

'Moreover, there is also strong evidence of slow information dissemination and a need to improve efficiency and liquidity in the BSE.

'The efficiency of the market in processing information is very important as it affects its allocative capacity and therefore its contribution to economic growth,' reads the research paper in the Bank of Botswana Research Bulletin of August 2010.

Apart from liquidity concerns, the BSE is characterised by lack of reaction to fundamentals and corporate and national economic development such as policy adjustments or fiscal pronouncements.

Unlike broader and more developed markets such as the JSE, the BSE never responds to events such as the monetary policy, budget announcement or any listed company development such as mergers and acquisitions.

Hypothetically, in an efficient market, all information - whether historical or current, public or private - is supposed to be reflected in stock prices. The study found that the existence of a 'buy-and-hold' investment strategy on the part of many institutional investors reinforces non-trading effects, which are responsible for the inefficiency in the market.

Another characteristic of the BSE blamed for the rigidity in the market is the limited number of stocks traded, implicitly resulting in a 'captive market' with little scope for investors to trade, given the few buyers and sellers.

The concentration of stock ownership, which limits trading, was also found to be exacerbated by the rampant pattern of cross-shareholding on the bourse among some of the largest corporations. 'Low liquidity in Botswana may also hamper the price discovery process and limit the effectiveness of the BSE in financing corporate spending, and in turn limit the impact of the stock market development on economic growth,' reads the research paper.

In terms of policy implications, the study suggests that regulatory authorities have to address trading fictions, promote timely dissemination of information to investors as strategy aimed at improving the efficiency of the BSE.

Despite the informational inefficiencies, the BSE - which was established in 1989 with five companies capitalised at P75 million - has grown considerably to 32 counters with a market capitalisation of over P400 billion, largely due to Anglo's P350 billion capitalisations.

However, the domestic board capitalisation stands at P30 billion.

Although liquidity is still low, the size of the BSE has grown from 10.8 percent in 1996 to 40.7 percent at the end of 2008.