Malawi Stock Exchange (MSE) has come under scrutiy with stock market analysts expressing fears that the recent share price surges on the bourse has made some stocks “overbought’, threatening an imminent pullback of prices.
The fears come on the back of share prices of five banks, which have jumped considerably high between January and September this year, raising their price-to-earnings (P/E) ratios and the market’s average P/E ratio, now at K42.57 for K1 of earnings on the bourse.
of FDH Bank on MSE on August 3 2020: | Nation
In its analysis of stocks performance on MSE, Cedar Capital Limited, one of the stockbroking firms, said in view of this trend, analysts are suggesting that the market is “overbought”, which means “stock prices have risen sharply and quickly, potentially beyond its intrinsic value”.
Reads in part the analysis authored by Cedar Capital Limited CEO Armstrong Kamphoni: “MSE’s weighted average P/Es on September 10 2022, 2023, 2024 and 2025 were K13.75, K21.92, K18.89 and K40.45, respectively.
“This means that K40.45 is significantly out of the historical range. Currently, many investors are wondering whether based on the P/Es, the MSE is now overbought.”
He said some analysts are suggesting that the best way to assess whether a company’s or a market’s P/E ratio, all factors considered, is “too high” or “too low” is by comparing the current P/E with its historical P/E range.
The analysis further indicated that share prices of listed banks, namely NBS Bank plc, FDH Bank plc, National Bank of Malawi plc, FMB Capital Holdings Limited plc, which owns First Capital Bank and Standard Bank plc have respectively risen by 489 percent, 331 percent, 215 percent, 242 percent and 399 percent to K1 025, K638, K10 905, K1 898 and K6 469 per share in that order.
In separate interview, other market analysts and stockbrokers also expressed the same fear in separate interviews, saying the situation may not be severe considering the small size and nature of MSE, which rarely responds to market developments.
Stockbrokers Malawi Limited equity investment analyst Kondwani Makwakwa said on Tuesday that while it is true that current share price levels may not fully represent the actual value of some counters, this is largely a reflection of the nature of the local bourse.
He said MSE is relatively small, with several counters rarely trading due to limited free float and the tendency of many investors to hold their shares for the long-term.
Said Makwawa: “Even initiatives such as share splits like the one undertaken by Standard Bank have not significantly changed this dynamic.
“As long as the number of listed companies remains narrow, such price movements will persist and, in many respects, can be considered normal given the structural characteristics of the market.”
However, he said this also exposes investors to the risk of price volatility that is not necessarily tied to company fundamentals, making it harder to make well-informed investment decisions.
“The real solution lies in increasing the number of listed companies as is the case in more vibrant exchanges. While the MSE has seen spectacular share price gains this year, these surges may not reflect genuine business growth or wealth creation, but rather the structural limitations of the market,” he said.
In a separate interview on Tuesday, financial expert and stock market investor Brian Kampanje said while some few market participants have really benefited from share price surges across several counters, there is a huge possibility of the market being “overbought” which could result in price drops that could lead to losses for institutional investors such as pension funds making losses.
“The possibility of bubble burst could happen if there are speculators who are driving the market share price of some counters.
“If the bubble would burst, this could cause massive losses on the pension schemes leading to misery on the general populace,” he said.
Kampanje said the quality of shares as collateral could also be negatively affected as lenders can go for lower coverage instead of 50 percent current market value.
“It is indeed important to investigate the movement and deal with the problem if proven. The sooner this is done the better,” he said.
MSE chief operations officer Kelline Kondowe declined to comment on the developments, saying the local bourse prefers to let the market analysis being left to stakeholders such as stockbrokers and capital markets analysts.
But she is quoted as having hailed the market’s recent strong performances as the sign of its strong potential.
