Home Insider 2016 – The Year of Trading Dangerously

2016 – The Year of Trading Dangerously

A rough year coming

A global market slowdown greeted the start of 2016. China’s market heading south and the Wall Street plunging in early January had a chilling effect not only in Myanmar but also in the rest of the world. Lower oil prices added to the uncertainties, boding well for emerging economies but has unsettled the status quo in the Middle East. This scenario witnessed the establishment of the country’s stock market.

Brimming optimism pervaded the launching of the Yangon Stock Exchange (YSX) in December last year. A joint venture between Daiwa Securities Group, Japan Exchange Group and Myanmar Economic Bank, the stock exchange is part of the efforts at developing the country’s capital market. It will give opportunities to local companies to raise capital for expansion, and also give foreign and local investors a platform to take advantage of the opportunities in the emerging market that is Myanmar.

Overhaul of the corporate sector

The exchange will provide a regulatory framework that would improve corporate standards in the country. Corporations wishing to list with the exchange will have to qualify as a public company which translates to transparency and disclosures. At present, most companies in the country are closed and family-owned, few are run by professional managers. Listing in the exchange will require undergoing overhaul in the systems and practices to meet the requirements of an investor-friendly company. For these companies, gone are the days of transactions hidden from the public and expenses that would diminish the value of shares. The value of the companies will be based on  their wealth-generating capacity and not on their connections with high-ranking government officials.

Local companies may find the requirements stringent, but a number has expressed interest in being among the first to be listed in the exchange. During the launching of the exchange, the shortlisted companies were announced which included First Myanmar Investment (FMI), First Private Bank, Great Hor Kham, Myanmar Agribusiness Public Corporation (MAPCO), Myanmar Citizens Bank and the Myanmar Thilawa SEZ Holdings.

Among the companies, the FMI of the Mr. Serge Pun has the edge with its experience as a listed company in Singapore stock exchange, the same with the Myanmar Thilawa SEZ Holdings which is co-owned by Japanese investors familiar with capital markets. The initial six companies represented the key sectors in the country – two banks, two holding companies, an agribusiness company and a construction company. Additional companies from other sectors that will list later will provide the spread that would reflect the exchange as a barometer of Myanmar business environment.

What is in it for the investing public?

The stock exchange offers an alternative aside from the traditional investment opportunities available to the people. Unlike banks, it does not offer ‘safekeeping services’ where people can deposit their money and expect a hefty return after some time. In essence, it is a market where investors can buy and sell shares of stocks of listed companies. Buying shares of stocks of a company makes the buyer a part owner of the company. When the company earns, the owners also earn from dividends distributed at the end of the operating year. The value of the shares increase as the income accumulates and the company expands. If the owner sells his shares, he can add a premium in the price to represent the increasing value of the stocks and the earning potential. The longer you hold on to a profitable company, the higher the value of your stocks. The basic rule in stock market investing is to buy low, hold on and sell high later.

Caveat emptor

It may look simple, but to the uninitiated it may be rocket science, and here lies the problem. People want to get more in the shortest time possible. There are those who think of the stock market as a get-rich-quick scheme, a lottery or a casino. The investment fund is considered as a bet, and they involve in day trading, where buying and selling of shares of stocks is based on the daily fluctuations of price rather than the intrinsic value of the company.

Fluctuations in the price happen when something happened inside the company that would affect its long-term capacity to generate profit. Examples of these events include changes in management team, changes in the core business or the obsolescence of the products being sold by the company. External events like oil price, war, and force majeure may also trigger fluctuations in the price of stocks. If any of these events happen, risk averse shareholders sell their stocks even below the price when they bought it.

The higher level of risks associated with the stock market reminds the people to be more conscious of their decisions. Funds to be invested at the stock market should come from the ‘reserve’ funds set aside for future needs and not the amount used for daily consumption needs or those set aside to cover emergencies.

Shift in investing attitude

The complexity of stock market investing raises the question of its acceptance by Myanmar investors. Traditional investment and safekeeping practices in the country are in tangible instruments particularly real estate properties and gold. Decades of closed economy developed the attitude of keeping investments that will last long like real estate, or those that can easily be monetized like gold.

The idea of investing in an intangible instrument like shares of stocks may not immediately sink in the mind of Myanmar investors. Trust in local companies at this point is not at its high point also because of the association of some companies with the past military administrators. The prevailing perception is that companies grow not because of the competency of the management team but the connection of its owners.

Feeling the risk

Trading is expected to start in late February or early March. The long wait is focused on how the investors will respond to the first initial public offering (IPO). Companies pray that people will come in droves to plunk their money with them. Interested investors on the other hand would like to make sure they buy the stocks with good value. Nothing would scare a company than a declining stock price after several weeks of the IPO, with price considered also as a reflection of the condition of the company. YSX would start with Myanmar citizens initially allowed to invest, with foreign investors allowed later. There goes the catch. With possibly limited local investors, the main players in the stock market would be foreign fund managers. But foreign investors might shy away from the market because of the present global economic slowdown. Emerging markets may not be an attractive proposition for foreign investors at this time. What the exchange should avoid is the experience of neighboring countries like Laos and Cambodia where the markets stagnated after the opening. Dangerous times indeed. As the saying goes – no pain, no gain. YSX may experience birth pains, but it is hoped that it will function as an instrument of economic development in due time.