Friday, June 7, 2013

The Caracas Stock Market, The “Best” In The World, Is Not As Good As It Seemed

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Caracas Stock Index during 2012

I keep reading these articles about the Caracas Stock Market being the “best” market in the world in 2012 and I am a little amused by the explanations, which tend to concentrate on the fact that President Chávez was ailing. There is a pretty good article here, but I am quoted in it, so I prefer to give my complete opinion.

Let’s start at the beginning, what is the definition of best?

If best is the market that went up the most, the question is: In what currency? Because if the Caracas Stock Index went up 302%, it did so in Bolivars, the local currency, which is fixed, controlled and established by Government fiat at Bs. 4.3 to the US$.

But…

the unspeakable, illegal, black market rate, which does not exist, actually devalued 50% in 2012, so that in US currency, if you managed to find someone that sold you US dollars, the Venezuelan Stock Market,went up “only” 150%, which brought it from the top performing market in the world, to the top performing market in the world, because the second best was Greece, up only 32%.

But again, the best?

Try to find some shares, without raising the price…

Well, let’s say the best market is the one that is covered by many analysts. How many do cover the Venezuelan Stock Market?

Umm, I think I am the only person left. Yeap! The only person that still writes regularly about the Caracas Stock Market in the world. If I am not, please write to me, we should talk once in a while, we are a pretty lonely hearts club, if you exist (I write a weekly report with market and company news and a monthly report for Veneconomy)

But let’s recall that the Venezuelan Government intervened, trampled over and busted 48 brokers in 2010, turning the market into a less of a market, as the most important players were simply wiped out. Some jailed. By now, only bank brokers actually do most of the tradings. The market has been diminished, minimized.

How much? Well, the stocks that trade in the market have a value of about US$ 7 to 8 billion in an economy worth about US$ 300 billion, that is all the market is worth.

But. How much is traded every day? Well, not much. Because the average daily trading volume was US$ 500 thousand in 2012. Not much. Think about it. If ten clients buy fifty thousand dollars, that is it!

Even worse, only 43 days in the year had a volume of more than half a million dollars. And 136 days had volume of less than US$ 50,000. Yeap! More than half the days of the year had volume of barely US$ 50,000. And all this at the official rate!!! Use the parallel rate and it gets really depressing, divide by four!

In fact, there were many days (about a dozen) in which no stocks traded. Not at all. Not one. In fact, there were 105 days in which less than 10,000 shares traded. An some of them are worth less than one Bolivar. Even worse, there were 24 days in which less than 1,000 shares traded.

So, why did stocks go up so much in 2012?

Easy:

1) Banks make money hand over fist in Venezuela thanks to revolutionary stupidity or largesse, they pay big dividends. As an example, Banco Provincial had a return on equity of 48% in 2012. It’s dividend grew 35% and for the full year, it paid a 14% dividend. Add the capital gains and the total return on its shares was 213% in a country where a CD pays 10% and inflation closed at 19.9%, if you believe Government figures. (I don’t, they said it would be 20%, funny, a 0.1% error and the third worst inflation in the world) Nice investment if you can get some shares, which is really hard.

2) Since Venezuela has strict foreign exchange controls, there are very few ways to protect the value of your money. You can buy “real assets” like a car, real state or other hard goods. But if you are an insider at any of the companies that trade, you can buy your own stock, which is cheap and most likely pays a good dividend too. In fact, much of  the large volume in the market were large “cross trades” performed by the broker of the bank whose shares were being traded.

3) Of the 16 shares in the Caracas Stock Exchange, three don’t trade. Cemex I and II, because the Chavez Government nationalized the company, paid Cemex for its assets, but left the minority stockholders hanging out to dry (So did Cemex). The shares have not traded since August 2009. Sivensa no longer trades either. The Government nationalized  half of the company in 2010 and the other half recently leaving the company with few assets.

4) You can buy Government owned companies, like CANTV and Banco de Venezuela, in the expectations that if there is change, they will be worth more or even privatized.

5) Investors know that a devaluation is coming, which benefits industrial companies or banks that are allowed 15% of their capital to be in foreign currency. Investors tend to rush to buy first, before this happens. Think Japan the last month, the currency devalues, the stock market goes up.

6) And yes, people did play Chavez’ illness. However, the market went up all year, whether he was fine or not, as shown in the graph above. Note the big spike in October right before the election, as some overly optimistic Venezuelans drove shares up. But also note that it went down, but recovered fast and by the beginning of November it was rising going to all time highs by December 1st.

But in the end, realities are what they are: It is impossible for a foreigner (or almost) to buy local shares. He would have to exchange currency at the official rate and or the black market, Foreign investors simply don’t like that. But even if they could, how much could they invest in a market that does US$ half a million a day?

Not much really, because these statistics are distorted by large cross trades.

So, the Caracas Stock Market is simply an oddity. Only Venezuelans allowed. A weird “market” which is not truly a market and whose movements respond to many weird variables and distortions created by the Chavez administration over the last 14 years.

But it is not the “best” market in the world, just the one that mathematically went up the most in a currency that nobody knows what it is worth.

And given the volumes, it takes very little to move prices.

But do you want a good investment in 2012? If you had bought PDVSA 2022 bond in US$, you would have paid 84% on Jan. 1st 2012. It was up to 117.5% today and you collected 12.75% in interest thanks to the stupid “revolution”. That gives you a total return of 55.41% in 2012 in US$, not in some controlled, trapped currency, called Bolivars. And a liquid bond, not some illiquid stock, quoted in Bolivars.

¡Viva la revolución!

Time to sell? You bet, very soon, very, very soon.

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