The Tribune

By Richard Coulson

Our Bahamas International Securities Exchange (BISX) has sent me a press release about the courtesy call they and closely linked Bahamas Central Securities Depositary (BCSD) paid on the Minister of Finance.

These two organizations form the structural backbone required for our capital market to function. The press release was bare of hard news, so I wonder what they found to talk about. Surely not the recent movement of the market, which has been abysmal.

In most countries with an operating stock exchange, the various valuation indexes and price quotations give a rough approximation of the health of the economy. GDP (gross domestic product) often moves in tandem with share prices.

If we look only at BISX information, we would conclude that our economy is in terrible shape, far worse than the S&P and Moody's ratings tell us. Consider these hard facts:

The ordinary shares of only 20 companies are listed on BISX, and thus are the sole visible proxy for our entire profit-oriented commercial economy of hundreds of businesses. Not included are the many strong enterprises that refuse to list on BISX, for reasons they consider entirely rational. We have no way of knowing how household names like Kelly's, John Bull, Asa Pritchard, AID, SuperValue, and Marathon Mall contribute to the national wealth--except that their earnings accrue to a small group families rather than the wider public.

Analyzing the 20 companies that have chosen to list, four of them are zombie enterprises that do not pay dividends or earn net income and rarely trade: two so-called real estate companies, one bank (the notorious BoB), and one closed-end investment company. The logic for de-listing them seems inescapable.

Of the 16 remaining companies, only one has enjoyed any appreciable increase in its share price--Freeport Oil Company, up about 40 percent so far this year. One bank, concentrating on mortgages, is down about 35 percent. Two strong companies, Cable Bahamas and Commonwealth Brewery, have suffered sharp price declines that proper analysis would show are unjustified and will probably be reversed.

The majority of the listed companies, 12 firms, have essentially traded flat. Even where trades do occur, they hardly demonstrate true liquidity, as sometimes weeks pass before a buyer and seller can be matched.

These negative or stagnant price movements are reflected in BISX's own price index for all ordinary shares, which this year has registered a drop from 1,925 to 1,825.

The only reason to buy the typical ordinary share has been the dividend yield, which in some cases exceeds 5 percent, far higher than the pitiful return on bank deposits and even higher than the interest rate on no-risk Government bonds. But the whole purpose of a stock exchange is to provide an attractive "total return" to investors, combining current dividend yield with capital gains from rising share prices. Without capital gains, a stock exchange for trading shares has little point.

This unhappy state of affairs cannot be charged to faults of BISX itself but stems from deep-seated Bahamian skepticism about minority equity ownership. The minority fear being ignored, and the majority fear loss of control.

These negative views can be revised. The digital revolution has transformed how business and financial information is publicized instantaneously. Our educational systems, combined with ever-changing hardware and software applications, assure that the percentage of our citizens without computer literacy will soon approach the vanishing point. In the United States, the UK, Asia, and Latin America, many of these rapid changes have already occurred and are sharpening daily. Investment knowledge is becoming ever more transparent.

Members of our small industry of financial analysts in pension funds and broker-dealers must pull their heads from the sand and wake up to the inevitable trends. When do you see our brokers express an opinion about a stock, as happens every minute in more active markets? Government can be persuaded to take supporting steps by opening up our equity investments to foreign buyers and cutting red-tape for local ones.

Gradually, we should see more local companies finding good reasons to list on BISX, and more investors to hold their shares, the essential features for a dynamic capital market.

It's estimated that 52 percent of adult American citizens are now shareholders in publicly traded companies. You can bet they would not be following this habit if it were causing them to lose money. Eventually, Bahamians can indulge the same habit, but only if we adopt modern capital markets practices of on-line investor education and aggressive marketing.