Between 2002 and 2006, the SEMTRI index has averaged a growth rate of 37.91% per annum and so far this year, the market has clocked a whoipping 20.64%. So then why has the market been doing so well and more importantly, what is the market outlook for the coming years?

First of all, most of the seven largest companies of the market are expected to produce excellent earnings figures in 2007. Due to a base effect caused by Chikungunya last year, an open sky policy, a good marketing campaign and relatively weaker Rs vs. the Euro, hotel stocks are expected to produce exceptional profit figures this year. The two conglomerates have either restructured or are restructuring with ever improving margins expected this year and the next and bank stocks are also expected to do reasonably well in terms of profit growth. With such expectations, it is of no surprise as to why pension, insurance, institutions, foreigners and the average investor have been pushing up the prices of such stocks.

Secondly, the Mauritian economy is awash with liquidity. Between 1997 and 2004, aggregate monetary resources of the economy grew by 12.43% while for the same period nominal GDP averaged 10.53%. Furthermore, Government borrowing through the domestic banking system soared during these years; between 1997 and 2006 for example the internal to external debt ratio of the central Government had almost quadrupled. The fiscal deficit was high and M1 money supply had soared to average 15.45% between 2001 and 2004. This excess liquidity only achieves one thing in the long term; it creates inflation, including asset inflation. In our view excess liquidity made its way to the stock market in a big way after the Government imposed tax on interest on deposits in 2006. Between July of 2006 and June 2007 the stock market recorded a massive growth rate of 71%! Of course the continuation of reforms and a lower corporate tax regime in the coming years also contributed to this growth.

So then how do we expect the stock market to evolve in the coming years?what is our view on the stock market and what do we expect in the coming years? We believe that though the market is currently trading at a forward PE of 11.80-12 and is still fairly valued, but it is certainly no longer a cheap market. Prices are converging towards our stock valuations quite fast despite the fact that in terms of earnings growth, we expect the 2007 momentum to be carried forward to a certain degree into 2008. In the longer term, earnings growth is expected to converge too nominal GDP growth, which should hover between 10.50% and 12.50%. If we look at the earnings yield of the market, it currently stands at 7.50% while the projected after tax yield on a 7 7-year GoM Government of Mauritius bond should stand at 9.56% (as per November 2007 auction figures).

Despite our forecast on inflation of 6.3%2-6.7% by next June (which should see long term yields edge slightly lower), equities are not expected to be as attractive as they were in 2005. Hence, one would expect a certain degree of moderation in terms of market growth in the coming years, a figure that is likely not to be dissimilar to what we expect in terms of earnings growth. Equities are hence expected to clock growth in the low to mid teens after 2008 with further exceptional years still possible as the economy continues to recover but all in al,l equities are still likely to generate returns that are higher than long term bonds and our outlook remains positive in the medium term.

<I>Contribution by</I>

<B>INVESTMENT PROFESSIONALS LTD (Feedback at [email protected]) </B>