Cyprus Stock Market Becalmed

by Lorys Charalambous, Tax-news.com, Cyprus

08 October 2001

With the Cyprus stock market index closing on Friday at 111, down from 800 at the peak of its short-lived boom in 1999, bored local stockbrokers faced with miniscule trading levels have resorted to betting with each other on when the index will reach its 1996 opening level of 100 again.

Many say that with the market in its present condition, volumes cannot sustain a total of more than 40 stockbroker firms, some with 30 or 40 employees. But President of the Brokers' Association Christodoulos Ellinas denied last week that stockbrokers are facing a growing unemployment problem. "I don't want to comment on rumours that have absolutely no basis in reality," he said. "No stockbroker has left or been forced out of his job because of the fall in the market."

He would say that, wouldn't he - other stockbrokers surveyed by the Cyprus Mail admitted there was a serious problem. Brokerage firms that used to handle daily volumes of £40 million now make do with £3 or £4 million. "A volume of £6 or £7 million, 90% of which is done by stock brokers not investors investing, plus commissions is not enough for 44 stockbroker offices," said Christos Eliades of Fairbrokers.

Marios Clerides, president of the Securities and Exchange Commission, agreed: "It's logical. I don't think between 40 and 45 firms can sustain these kinds of low volumes." Even the vice-chairman of the Brokers' Association, Stavros Agrotis, openly disagreed with his boss: "It's something that's already started. Firms have laid off brokers and all firms are making losses," he said. "Some of the bigger offices may have accumulated enough resources from the 1999 boom, but if they used to have 30 or 40 people working for them, how long can they continue without letting people go? Lots of people have left. All the agents, the middle men, have disappeared." Eliades said that his own firm had cut back from 14 staff to 5: "We're minimising expenses to hang in there."

Stock market professionals attribute the terrible state of the market to a lack of investor belief in the institution, fed by the willingness of banks to lend when the boom was at its height, leaving many or even most retail investors nursing severe losses when the market collapsed in 2000. Too late, the government then introduced stiffer margin requirements and other measures designed to limit speculation, but these have only served to depress demand for shares.

Salvation for the market depends on the creation of rational as opposed to speculative demand through retail or wholesale savings instruments, and this in turn may depend on the government's willingness to create appropriate tax incentives, as well as on the creation of a CSE Stability Fund which it is hoped will assist the return of investor confidence. The Fund will be fed by the proceeds of the existing transaction tax; but the parliament has shown itself unwilling to agree this legislation in its original form, and is currently awaiting a new draft from Finance Minister Takis Klerides which will not contain state guarantees for the Fund.

One bull point for the market is that the Cyprus banks are awash with cash and that interest rates are likely to continue to fall, meaning that investors who plumped for a safe 7% a year ago may now turn up their noses at a paltry 5% in favour of low-priced equities already offering more than 5% and with substantial up-side potential in the medium term. The sad truth however is that after a really good party there is usually a massive hangover, and the only real cure is probably time.

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