BSE broadens base to tackle illiquidity

Brian Benza
Staff Writer | Friday September 24, 2010 00:00

Speaking at the presentation of the BSE Annual Report for 2009 in Gaborone this week, the Chief Executive Officer of the BSE, Hiran Mendis, said the country's investment market was too small for the BSE to specialise in equities.

There is a huge shortage of securities in the market currently, resulting in high levels of illiquidity. 'We are trying to increase securities supply by expanding the amount of products we offer,' he said. 'Presently, there are so many investors, both foreign and local, that want to buy securities, but they are just not available.'

Botswana's stock market is currently highly illiquid, hampering the price discovery process, with institutional investors sitting on stocks while most retail investors may be able to buy up to only 20 percent in each counter due to the free float requirements. Apart from Absa Capital's Gold Exchange Traded Fund (ETF) that was introduced this year, the BSE plans to introduce more ETFs in the near future in a bid to improve the breadth and depth of the market and thereby improve risk-return options available to investors.

The gold ETF tracks the price of gold and is supported by physical gold assets. One security or unit of investment in the ETF is equivalent to one hundredth of a gold ounce. Another product, Satrix40 ETF, is expected to be on the bourse soon, after its promoters Satrix managers made presentations to investors on it last year.

In a bid to make ETF's more affordable for retail investors, the BSE amended its trading rule that requires the minimum trading quantity of a security to be 100 units. One the strategies also identified by the BSE is the development of the debt market in an effort to address major constraints, which include listing requirements favouring equity, market infrastructure and IT, absence of credit ratings, a low investor base and general ignorance of the market and its benefits to issuers and investors alike.

As a result, the BSE has come up with a debt market development strategy which is expected to deepen the country's bond market beyond its current P6 billion level and at the same time boost economic activity through improved capital flow.

Mendis revealed that a task force set up to develop the strategy has already produced a draft report, which will set the pace for the development of a master plan which will cut out the bias towards equities in the market. Another long-term plan in BSE books meant to import liquidity is the opening up of the regional investment external hub under the auspices of the Committee of SADC Stock Exchanges.

The SADC Exchanges Interconnectivity Project aims to achieve a real time network of SADC exchanges through the implementation of a hub. This external hub will allow exchanges to connect to each other's trading platforms and ultimately allow investors the ability to trade on all SADC exchanges through their local brokerage.

However, this plan will remain a pipe dream for a while as it requires all exchanges to be fully automated.Currently, only three of the 10 bourses in the 10-member committee are fully automated. The committee comprises Botswana, Malawi, Mauritius, Mozambique, South Africa, Swaziland, Namibia, Tanzania, Zambia and Zimbabwe. A recent study conducted by Bank of Botswana researchers found strong evidence of slow information dissemination and a need to improve efficiency and liquidity on the BSE. Apart from liquidity concerns, the report says 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.