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Impact Investing

IPE special report May 2018

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Island fever

The extraordinary story of the Cyprus Stock Exchange continued last month when it re-opened after a six-week closure.
The decision to suspend trading was taken after the market’s capitalisation doubled to £3.8bn (e5.9bn) over a seven-month period. On one day in late July prices surged by 18.6%, and staff and brokers were unable to keep up with the paperwork. Commenting on the decision to close, the exchange’s chairman Dinos Papadopoulos said: “As an emerging market it was a difficult decision to take, as it could affect confidence when we re-open, but it was necessary.”
At the time he was envisaging a week-long shutdown, instead the problems have taken a month and a half to resolve. As Papadopoulos noted, the closure could have had an adverse affect on investor confidence, but that seems unlikely to be the case.
No one predicted the extraordinary surge of investment that has been steadily increasing as the year has progressed. Calliope Toumpouris at CLR stockbrokers in Nicosia has seen his staff increase from 12 to 60 in the three months up to August. “Even then we could not cope with the daily doubling of our client base towards the suspension of trading,” he says.
Average daily transactions at the exchange have gone from around 500 at the turn of the year to about 3,500. This on a divided island with an ethnic Greek population of just 630,000. Locals admit that when the exchange first opened three years ago they would not have thought of investing, perceiving it as a playground for the rich. That has all changed now as everyone from shopkeepers to shepherds join expatriates and investors from the Greek mainland in a massive gamble.
The latter group is of particular interest. Athens has been the world’s best-performing market this year, and the prospect of some of the leading Cyprus stocks, such as Bank of Cyprus and Cyprus Popular Bank, being listed on that exchange has spurred demand. George Athanassakis, senior equity analyst at NBG International, says the involvement of Greek investors is likely to continue to fuel demand, although he warns that the market is responding to the rules of supply and demand rather than logic. “It is difficult to predict what will happen now. Clearly the market is overvalued, and we are advising clients to sell, but Cyprus has bucked the trend and defied logic so far, so who says it will not continue to do so.”
Much will depend on the banks, which represent a large proportion of the capitalisation of the exchange. While rumours of mergers between Greek banks and institutions on the island continue, Cypriot banks are likely to continue to be over-valued. Athanassakis suspects that, as demand has been held back for six weeks, the market could surge again.
At the exchange Constantinos Timbios, the administrative executive, warned that only firms that had cleared their backlog would be allowed to trade on the re-opened exchange. “We know that despite having had a long period to clear up their paperwork, some firms have been unable to comply. It is important for investor confidence that we are strict about these requirements.” With few foreign investors, however, the confidence of local investors is unlikely to be shaken, especially as so many are new to investing in equities, and have little idea about market fundamentals.
Overall confidence is also helped by the continuing membership talks between Cyprus and the European Union, and relative political stability on the divided island. There is also a hope that the so-called “earthquake diplomacy” that has developed between Greece and Turkey will have a trickle-down effect on the island. Also, with the government set to lift restrictions on foreign exchange, there seems little reason to believe the market will slump due to lack of demand.
Kevin Hall

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