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The arrival of the stock market and its implications

The arrival of the stock market and its implications

It Begin in November of 2006 with a memorandum of understanding (MOU) between the Ministry of Economy and Finance (MEF) and the Korean Exchange (KRX) titled “The Development of the Securities Market in Cambodia”.

A further MOU between the parties in January, 2008 established the Cambodia Securities Exchange (CSX), of which the MEF owns 55 per cent and the KRX owns 45 per cent.

On July 11, 2011, the CSX was inaugurated, however without any listed securities to trade.  The launch of Cambodia’s equity market finally came to fruition on February 29 with the commencement of book-building by sole underwriter, book runner and lead manager Tongyang Securities (Cambodia) for the primary offering of Phnom Penh Water Supply Authority, the first initial public offering
in Cambodia.

An IPO is the first sale and issue of a company’s shares to investors on a public exchange.  A company may require capital to expand, develop new products, purchase buildings or equipment, to acquire another company or simply for working capital.  There are generally two methods to raise capital, through debt financing or equity financing.  In Cambodia a company would usually take a loan from a bank.

This would require the company to repay the loan principal and pay interest from cash-flows.  Standard practice would also require the company to pledge assets and contractually agree to covenants which restricts the company’s activities and requires the company to comply with ongoing mandated conditions.   The advantage to the company is that if it successfully pays back the loan, it has not sacrificed dilution of ownership, and the owners reap the benefits of the profits from the financing.

When a company sells stock to investors this is known as equity financing.  When investors purchase stock, they own a pro-rata share in the company and are entitled to a portion of the company’s profits, usually through payment of dividends, and have claim on the company’s assets, should the company go bankrupt and after creditors are paid.

The main advantage to a company in issuing equity is that the company does not have to pay back the monies received or pay interest, but in return relinquishes ownership in the business and a degree of control as investors normally have voting rights, but would not get involved in the day to day running of the business.  

The arrival of the exchange thus gives business owners alternatives.   Rather than rely on self-financing their business and borrowing from banks, they can offer ownership in their business to investors, spreading the risk and relieving the business of the burden of debt servicing.  It also creates a new asset class for Cambodian individuals and institutions to invest in.  Presently investment options are limited to bank deposits, property, precious metals and currencies.

The availability of equity financing, and the eventual launch of the bond market, may draw business away from the Kingdom’s already overcrowded banking market, and with this additional competition, lead to lower borrowing rates.

Banks will also be competing with the stock market for depositors’ money, which may be funnelled into the market, putting a strain on the already high cost of funds of dollars.

As stocks will be quoted in riel, although they can initially settle in both USD and riel, the demand for the riel should increase, as already evidenced in the appreciation of the riel inthe book-building process for PPSWA.  Cambodia will now have a local population of equity investors who can invest in the enterprises of the country, but will need to understand the risk and rewards of investing in the stock market, as the overwhelming majority will be first-time investors

Although in recent years equity markets globally have struggled to meet historical long-term returns, it is a general premise that stocks return 10 to 12 per cent per annum.   From 1900 to 2011, the world’s most followed benchmark index, the S&P 500, had an average return of 11.4 per cent and a compounded annual return of 9.5 per cent.  Effectively, $1 invested in 1900 would be worth $25.9K today.  In the past 30 years, the returns are more impressive with an average return of 12 per cent, and a compound annual return of 10.5 per cent.

The best proven stock investment strategy is to invest in good companies for the long term.  Buy and hold: investing long-term on the premise that the market will provide a good rate of return despite periods of volatility, is most suitable for the average investor.  Timing the market and attempting to predict the direction of prices, remains difficult for even the most skilled traders.    

The dawn of the stock market raises some serious questions.  Does the new breed of Cambodian investor understand what they are investing in, the risks and rewards of investing, and the different types of investment strategies that can be undertaken?  Hopefully the regulators, media, advisers and brokers can educate new investors on the merits of long-term investing and ensure that the markets are not viewed as an alternative to the casinos.  

Anthony Galliano, chief executive officer, Cambodian Investment Management, email [email protected]


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