BSE to automate next year - Mendis

Staff Writer | Wednesday September 15, 2010 00:00

In an interview with Reuters, the Chief Executive Officer of the BSE, Hiran Mendis, said the bourse should fully automate early next year and improve liquidity levels which have deterred foreign interest.

Mendis said electronic trading should arrive in the first half of 2011, to be followed some time after that by Internet-based trading.

'Those developments will make it easier for both foreign investors and local investors to access the market,' he said.

However, it remains to be seen to what extent the full automation, which started two years ago with the acquisition of a Central Securities Depository (CSD) system, will improve liquidity on the bourse that is largely dominated by inactive long-term investors. CSD is basically a computer system that facilitates the holding of securities in electronic accounts in contrast to paper certificates that BSE has been using. Stock exchanges around the world are introducing the electronic system to replace the physical handling of shares.

However, for the BSE - where most listed companies are backed by their parent companies outside Botswana - there are very few retail or active traders, rendering the market highly illiquid.

Most foreign-owned stocks are up to 80 percent owned by parent companies with an insignificant 20 percent, which is the BSE's mandatory free float, held by retail investors, keeping daily liquidity at a minimum.

Also due to the lack of other investment vehicles on the capital markets, pension funds and asset managers tend to hold large long-term stakes in the listed stocks, making it difficult for foreign or domestic investors to build up significant holdings.

Except for Stanchart, which is currently on the market seeking to raise P137 million through a rights issue, most companies never raise cash from the bourse as they are backed by financially muscled parent multinational firms.

A recent study carried out by Bank of Botswana analysts pointed out that the BSE is faced with inefficiency challenges and needs an overhaul to transform the bourse into a proficient market that can contribute positively to economic growth.

According to the research by the 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 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,' reads the research paper in the Bank of Botswana Research Bulletin of August 2010.

'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.'

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

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