■ Mauritius in the picture:

Should the US plunge into recession (with its ensuing impact on global stock markets), there is a possibility that the Stock Exchange of Mauritius (SEM) could be affected both directly and indirectly. Directly, in the sense that foreigners could close out their positions4 in Mauritius and capitalize on the gains they have accumulated over the past years, as it happened in previous global crises (Asian crisis and the bursting of the Dotcom bubble). However, it has to be noted that, in the past, the local stock market was more thinly traded and less developed than it is now, and also coinciding those periods, local investor sentiment wasn?t very strong about the domestic market given that several major companies were undergoing a restructuring phase, which compounded to result in a decline in the SEMDEX.

3. Models from various banks are showing that currently, the probability the US is in a recession stands at above 80%

4. If global emerging markets were to fall significantly, institutional investors could see their exposure (portfolio weightings) to Mauritian equities increase. Should such weightings exceed any weighting thresholds, this could lead to forced selling to restore ?compliant? allocation weightings.

It is also good to note that the SEMDEX (unlike emerging markets overall) exhibits a very low correlation with the major global stock indices (see table). This implies that the local stock market does not normally move in the same direction as do the global markets. In the current situation, although it is acknowledged that the global financial crisis could have a direct impact on the SEM, we believe that this time around, the overall effect should be mitigated to some extent. While in the previous two crises, net foreign purchases as a percentage of total purchases of SEM stocks averaged around 28%, over the past three years it has been about 20%. Moreover, the fundamentals for the Mauritian economy as well as the local companies are still strong and hence, in a scenario where foreigners close out their positions in the SEM, domestic investors shouldn?t be spooked by such actions and follow them.

The indirect effect of a global slowdown for Mauritius should occur with a lag and potentially affect the fundamentals of the economy. In essence, we are making reference to a probable slowdown in exports as well as tourist arrivals in the country, which could adversely affect the valuation of domestic companies.

■ Forex

On the foreign exchange front, reflecting both the domestic economic fundamentals as well as the global ones (read; expected further rate cuts from the Fed and the Bank of England), we should witness further appreciation of the rupee versus the US dollar and the pound sterling in particular.

■ Conclusion

For the time being, market players are still unsure whether the US is already in a recession or not. This is particularly important since investor sentiment would be affected accordingly. If the US avoids a recession, there would likely be a positive impact, but confirmation of a recession would probably result in a more prolonged sell-off in global asset markets. Hence, caution is advised when considering ?high(er) risk? assets such as equities. In the Mauritian context, should the US go in a recession, and should foreigners engage in a profit-taking activity on the SEM, local investors should not be spooked and engaged in panic sell-off of domestic shares. Instead, investment decisions should continue to be based on the fundamentals of the economy and on local corporate growth prospects.

Contributed by

INVESTMENT PROFESSIONALS LTD (Feedback: [email protected])

DISCLAIMER

This analysis report is provided by Investment Professionals Ltd. for information purposes only. Neither the information nor any opinion expressed constitutes an investment advice, an offer or an invitation to make an offer, to buy or sell any fund or stocks. This report does not have regard to the specific investment objectives and financial situation of any specific person who may receive/read this report. Investors should seek financial advice regarding the appropriateness of investing in any funds or stocks and should understand that future expectations may not be realized. Investors should note that the price or value of any funds or stocks may rise or fall. Past performance is not a guide to future performance.