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Tracking The ‘Moodswings’ Of The CSX Index – An Analyst’s View

The local bourse has charted a downward trend since early April, likely a reflection of traders’ sentiment following a recent upheaval by index heavyweight Acleda. Industry expert Chakara Sisowath notes that while there are several factors driving the index, growth is expected around the corner. He shares his views in this Q&A

Last week, Cambodia Securities Index (CSX) fell to a five-year low at 422.9 points as sellers overtook buyers amid Acleda Bank Plc’s announcement to lower the dividend payout ratio for its 2023 fiscal year. The index descended even lower this week after opening at 420.43 points and ending Monday’s trade at 410.49 points.

According to Chakara Sisowath, executive director of Ratings Agency of (Cambodia) Plc, the index, similar to stock prices, is driven by three main factors – fundamentals, valuation and sentiment.

Chakara, whose firm provides global benchmark credit rating on local companies and bonds, takes a closer look at the index’s performance over the last five years, as well as Acleda, and the impact of global interest rates on the bourse.

He shares his insights with Kiripost, using stock price data as of April 25, 2024. Chakara Sisowath has also held Acleda shares since its IPO.

What is driving the index performance?

Typically, three main factors drive stock prices: fundamentals, valuation and sentiment. The performance of an index is subject to the same as it is an average of the performances of its component stocks. Looking specifically at the case of Cambodia and the CSX, fundamentals have been relatively resilient.

If we take gross domestic product (GDP) as a proxy for sales and profits, GDP growth registered only one year of negative growth in 2020 (-3.1 percent) because of the Covid-19 pandemic, whereas CSX recorded three years of negative performance in 2020, 2021 and 2023 (see Chart 1).

Chart 1
Chart 1

Valuations mostly depend on the supply and demand for stocks, which in turn is affected by interest rates. There is no government bond market to provide a benchmark for interest rates in Cambodia. Using National Bank of Cambodia (NBC) data on USD term loans weighted average rate as a proxy, we can see that interest rates have been supportive in 2018 and 2019 as the CSX index rose when interest rates declined. Conversely, the CSX index fell when interest rates rose from 2020 to 2024 (see Chart 2). This is the pattern that is consistent with financial theory.

Chart 2
Chart 2

Finally, sentiment is difficult to gauge precisely. Investors were obviously optimistic in 2018 and 2019, pushing the CSX index to an all-time high in 2019. Then they turned bearish in 2020 AND 2021 because of the Covid-19 pandemic.  However, investors have remained in a negative mood up to now even though economic activity has rebounded, which is counterintuitive.

To summarise, the most obvious explanation seems to be that the rise in interest rates has negatively affected the CSX index. The performance of Acleda’s share price has also been a negative factor in the performance of the CSX since Acleda still represents 30 percent of the CSX capitalisation, as of April 25, 2024, down from about 70 percent in May 2020, which gave it an outsized influence on the CSX.

Investors remain disappointed with Acleda. Has this impacted their trading appetite?

Investors might be disappointed with Acleda’s share price performance. Since its initial public offering (IPO), it is down 51.8 percent (as of April 25), equivalent to a drop of 16.7 percent annually. However, from a business perspective, Acleda has done remarkably well. Revenues and net profits have grown at 11.1 percent and 4.7 percent CAGR (compound annual growth rate) respectively between 2018 and 2023 in a challenging environment.

In my view, the divergence between the operational results and the share price performance is due to a technical issue. The Acleda Staff Association (ASA), which owned 25 percent of the Acleda shares, has been continuously selling down its stake, putting pressure on the share price. As a result, investors are in no hurry to step in and buy even though fundamentally, Acleda is doing well.

Apart from Acleda, the rest of the counters also sank. Did Acleda’s dividend announcement dampen investors’ confidence? What’s the reason for the dip in the overall performance of the counters?

Maybe the dividend payout of 10 percent was a disappointment for some investors since it is significantly lower than the previous years’ level, but I don’t share this feeling. In my view, Acleda’s management is mindful of its capital adequacy ratio.  Retaining earnings to strengthen its balance sheet should be viewed favourably in my mind. As for the dip in the performance of other stocks, we highlight again the divergence with the operational performance. Except for one company, the companies listed on the main board of the CSX remained profitable.

It will be earnings season soon (financial results of companies for the first fiscal quarter of 2024), can we expect some positivity creeping into the stock market?

Operational results were positive already in 2022 and 2023. I believe 2024 will see a continuation of the trend. For instance, the Asian Development Bank is forecasting GDP growth of 5.8 percent for Cambodia in 2024. What could change investors’ sentiment is a turnaround in interest rates. This is largely contingent on external factors over which Cambodia has little control. For example, an easing of the US Federal Reserve’s monetary policy and a cooling in global inflation would have a large positive impact on the stock market.

What’s your outlook on the index amid current economic conditions?

I believe that the divergence that we observed between share price performance and business performance will correct itself at some point. The trigger may be an interest rate cut by the US Federal Reserve that has been expected for some time now.

Source: Kiripost