Is there a Bubble on the Stock Market in Mauritius?

The recent performance of stocks traded in the Stock Exchange of Mauritius has been remarkable. The SEMDEX, the official index representing all the 40 or so stocks has grown by 130% in the last two years (Figure 1). From January to November this year, the SEMDEX went up by 40% in US dollar terms. If history can serve as a guide, it is to be noted that a similar trend was observed between 1990 to 1994, when the stock market crashed, and took nearly 8 years to recover (Figure 2). The obvious question therefore is: is there a bubble in the stock market in Mauritius and if so, will it burst and when? In my view, things are different this time. I can find two interrelated reasons for this:

1. The profile of the investor has changed. In the 1990s, the stock market grew out of domestic demand consisting of inexperienced local investors (the Stock Exchange of Mauritius was created in 1989). Today, it is foreign money that is driving the market. In fact, during the last 3 years, the net purchases of stocks by foreigners has exceeded 2% of the total value of stocks (market capitalisation). Foreign money is coming from Institutional Investors (a major investor in Mauritian stocks is based in Dubai). According to the IMF, “Institutional investors often are at the forefront in promoting efficient market practices and financial innovation. They typically favor greater transparency and market integrity and encourage efficient trading and settlement facilities.”

These investors assess the risk profile of the country and its growth prospects. Growth is expected to hover around 4-5% until 2010, driven by the tourism and financial sectors, and supported by emerging sectors (call centres, seafood sector, and a new deep-sea water industry). Risks in the form of the unexpected depreciation of the local currency is not likely to be high: the newly set Monetary Policy Committee (MPC) of the Bank of Mauritius is expected to be more conservative in fighting inflation.

2. A notable feature of the Stock Market in Mauritius today that most stocks are not growing as fast as the SEMDEX. Many stocks have actually lost considerable value in the last two years. In fact, growth is driven by the demand for the stocks of five ‘blue-chip’ companies (Figure 3): the Mauritius Commercial Bank (MCB) and the State Bank of Mauritius (SBM), both in the finance sector, the Naiade Resorts and the New Mauritius Hotels (NMH) Ltd, both in the hotel and leisure sectors and the Rogers Group, a conglomerate which main activities are in the hotels and leisure, aviation, shipping and finance sectors. In 2007, the stocks of good companies operating in promising sectors of the economy (namely, the tourism and financial sectors) are rising, those of bad companies (poor management, sector with lower prospects) are not. This is a clear sign that investors are more discerning now than they were in the 1990s.

Overall, the fears that the stock market in Mauritius will soon crash seem unjustified. Although one cannot expect stock prices to grow by 40% a year, the market will experience a soft landing to a more reasonable 15% in US dollar terms, provided, of course, that the forecasts for the next 3-4 years of sustained growth of the economy are realised.

Figure 1: SEMDEX, 2005 -2007

Figure 2: SEMDEX, 1990 – 2005

Figure 3: STOCK PRICES OF BLUECHIP COMPANIES, 2005-2007