Risk Management (Palestine Stock Exchange)

Transcription

1 April 24, 2013 Introduction The concept of "Risk management" can be considered as the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events, or to maximize the realization of opportunities. Risk management concept entered the stock market with a different shape, since investment in Arab Stock Markets including Palestine Stock Exchange had expanded widely in the previous years, to take many forms such as long term investing and speculations whether the executor is a fund portfolio, institution or individual. In spite of the investor type, Risk management reflects the method of the concept's entrance to the investment portfolio in a way that reflects the investor's degree of acceptance to "risk", which in its turn varies among investors and portfolios. Risk management importance refers to obtain a statistical measure of risk that is reliable to define the investment required rate of return ; where to maximize return on the same level of risk or minimize the risk on the same level of return. Thus, this study aims to raise the awareness of investors in a simple and understandable way in taking the investment decision independently and away from external factors like rumors and inefficiency which affect the investors' decision in such like Palestine Stock Exchange PEX. The study highlights Beta s for all traded companies in the PEX with Al Quds Index from one side and their sectors from other side. Al Quds Index Within its annual revision, Palestine Stock Exchange PEX modified Al-Quds Index sample for the year 2013, after revising the sample used in its calculation, to include 15 companies without any change than representing 83% of the listed companies total market capitalization. After applying the revision criteria, one company has been replaced from 2012 s selected sample, to recently include the shares of The National Insurance Company NIC in the Insurance Sector instead of Ahliea Insurance Group AIG. In this context, Al-Quds Index constitutes the compass of PEX for several years reflecting its performance and activity, comprehending the profitability of the public shareholding companies, and the confidence of various dealers categories in economic future of the country. These periodic annual revision of Al Quds index sample by computing the optimum companies each time -would contribute in a better and more comprehensive outlook of PEX performance, in parallel with all the procedures and steps to be listed on the emerging and frontier markets indices. Banking & Financial Services Industry Insurance Investment Services Bank of Palestine The National Bank Palestine Islamic Bank Arab Islamic Bank Golden Wheat Mills Company Birzeit Pharmaceutical Company Jerusalem Cigarette Company National Insurance Company Palestine Development & Investment Company Palestine Real Estate Investment Company Union Construction And Investment Palestine Industrial Investment Company Palestine Telecommunications Company Wataniya Palestine Mobile Telecommunications Palestine Electric Company 1

2 Glossary Risk Management The process of identification, analysis and either acceptance or mitigation of uncertainty in investment decision-making. Essentially, risk management occurs anytime an investor or fund manager analyzes and attempts to quantify the potential for losses in an investment and then takes the appropriate action (or inaction) given their investment objectives and risk tolerance. Inadequate risk management can result in severe consequences for companies as well as individuals. For example, the recession that began in 2008 was largely caused by the loose credit risk management of financial firms. Simply put, risk management is a two-step process - determining what risks exist in an investment and then handling those risks in a way best-suited to your investment objectives. Risk management occurs everywhere in the financial world. It occurs when an investor buys low-risk government bonds over more risky corporate debt, when a fund manager hedges their currency exposure with currency derivatives and when a bank performs a credit check on an individual before issuing them a personal line of credit. Risk Risk is defined as the chance that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment. Those of us who work hard for every penny we earn have a harder time parting with money. Therefore, people with less disposable income tend to be, by necessity, more risk averse. On the other end of the spectrum, day traders feel if they aren't making dozens of trades a day there is a problem. These people are risk lovers. When investing in stocks, bonds, or any investment instrument, there is a lot more risk than you'd think. In the next section, we'll take a look at the different kind of risk that often threatens investors' returns. Systematic Risk The risk inherent to the entire market or entire market segment. Also known as "un-diversifiable risk" or "market risk."interest rates, recession and wars all represent sources of systematic risk because they affect the entire market and cannot be avoided through diversification. Whereas this type of risk affects a broad range of securities, unsystematic risk affects a very specific group of securities or an individual security. Systematic risk can be mitigated only by being hedged. Systematic risk influences a large number of assets. A significant political event, for example, could affect several of the assets in your portfolio. It is virtually impossible to protect yourself against this type of risk. Unsystematic Risk Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through appropriate diversification. Also known as "specific risk", "diversifiable risk" or "residual risk". Unsystematic risk is sometimes referred to as "specific risk". This kind of risk affects a very small number of assets. An example is news that affects a specific stock such as a sudden strike by employees. Diversification is the only way to protect yourself from unsystematic risk. 2

3 Correlation In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used in advanced portfolio management. Correlation is computed into what is known as the correlation coefficient, which ranges between -1 and +1. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves, either up or down, the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation means that if one security moves in either direction the security that is perfectly negatively correlated will move in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; they are completely random. In real life, perfectly correlated securities are rare, rather you will find securities with some degree of correlation. Beta A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns. Also known as "beta coefficient". Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's returns to respond to swings in the market. A beta of 1 indicates that the security's price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market. Many utilities stocks have a beta of less than 1. Conversely, most high-tech Nasdaq-based stocks have a beta of greater than 1, offering the possibility of a higher rate of return, but also posing more risk. 3

4 PALTEL Return PALTEL Return WATANIYA Return WATANIYA Return Services Sector Light insight Services Sector is more affected by the systematic risk that represents the political and economic situation than the unsystematic risk that represents the service sector risk itself. For example, Israeli restrictions to any development in these services (electricity, telecommunications and transportation) exist in order to increase dependence on Israel. PALTEL and WATANIYA face many restrictions by the Israeli such as detention their telecommunication towers on checkpoints and unfair competition with Israeli companies in addition to the non-licensed internet providers. Also, political instability caused a downturn in tourism which was reflected in the number of service activities: transportation, restaurants and hotels, such as RSR, AHC, and also affect WASSEL and ARE. The Israeli Restrictions and lack of liquidity also affect PEC since its headquarter is located in Gaza Strip. Company Symbol Al Quds Index 15 Months Beta Services Sector Wataniya Palestine Mobile Telecommunications WATANIYA Palestine Telecommunications Company PALTEL Al-Wataniah Towers Company ABRAJ GlobalCom Telecommunications GCOM Palestine Electric Company PEC Arab Hotel Company AHC Arab Palestinian Shopping Centers PLAZA Arab Real Estate Establishment ARE Ramallah Summer Resorts Company RSR The Palestinian Company for Distribution & Logistics Services WASSEL PalAqar for Real Estate Development & Management PALAQAR Nablus Surgical Center NSC Services Companies Characteristics Lines WATANIYA characteristic line (1) y = 1.03x Al Quds Index Return PALTEL characteristic line (1) y = 1.08x WATANIYA characteristic line (2) Services Return y = 1.09x PALTEL characteristic line (2) y = 1.06x Al Quds Index Return Services Sector Return 4

5 PEC Return PEC Return GCOM Return GCOM Return ABRAJ Return ABRAJ Return Services Companies Characteristics Lines - Continued 1 ABRAJ characteristic line (1) y = 0.72x ABRAJ characteristic line (2) y = 0.71x % Al Quds Index Return % Services Return On 21/10/2012 GCOM s price was floated due to the GA decision to decrease the paid up capital by 42.68%. GCOM characteristic line (1) 7 y = 1.94x GCOM characteristic line (2) y = 0.48x AL -1 Quds Index Return - -1 Services Return PEC characteristic line (1) y = 0.57x PEC characteristic line (2) y = 0.48x Al Quds Index Return Services Return 5

6 ARE Return ARE Return PLAZA Return PLAZA Return AHC Return AHC Return Services Companies Characteristics Lines - Continued 2 On 20/02/2012 AHC s price was floated as a result of the GA decision to decrease the paid-up capital by 21.29%. AHC characteristic line (1) 2 y = 0.51x AHC characteristic line (2) y = 0.42x Al -1 Quds Index Return - -1 Services Return PLAZA characteristic line (1) y = 0.24x A; Quds Index Return PLAZA characteristic line (2) y = 0.27x Services Return ARE characteristic line (1) y = 0.24x ARE characteristic line (2) y = 0.12x Al Quds Index Return - Services Return 6

7 PALAQAR Return PALAQAR Return WASSEL Return WASSEL Return RSR Return RSR Return Services Companies Characteristics Lines - Continued 3 RSR characteristic line (1) y = -0.01x RSR characteristic line (2) y = 0.07x Al Quds Index Return - Services Return WASSEL characteristic line (1) y = 0.12x WASSEL characteristic line (2) y = 0.003x Al Quds Index Return Services Return PALAQAR characteristic line (1) PALAQAR characteristic line (2) y = x Al Quds Index Return Services Return y = -0.00x

8 NSC Return NSC Return Services Companies Characteristics Lines - Continued 4 Light insight Banking & Financial sevices is most affected by the unsystematic risk that represents the banking and financial service risks themselves. Banks and financial services sector in Palestine provides many services: commercial banking, Islamic banking, mortgage financing and microfinance banking. All banks in the Palestinian Territories are suffering from a number of obstacles which have forced them to adopt very strict credit policies. Also, the PMA s continuous plans to raise the banks capital has also affected the bank s operations. For Islamic banks such as: AIB and ISBK, where the cost of financing on average is greater than the cost of financing by conventional banks, the major risk facing them is raising their provisions to prevent the international financial crisis results. For commercial banks that provide all types of financial services such as BOP, PIBC and TNB face an increasing investment risk affected by a lack of political and economic stability in the Palestinian territories due to Israeli occupation. In addition, the absence of a national currency leads to bank surpluses being transferred abroad. NSC characteristic line (1) NSC characteristic line (2) y = 0.05x y = -0.02x Al Quds Index Return Services Return Banking & Financial Services Sector 15 Months Beta Company Symbol Al Quds Index Banking Sector Bank of Palestine BOP Palestine Islamic Bank ISBK The National Bank TNB Arab Islamic Bank AIB Al-Quds Bank QUDS Palestine Commercial Bank PCB Palestine Investment Bank PIBC Palestine Mortgage & Housing Corporation PMHC Palestine Securities Exchange PSE

9 TNB Return TNB Return ISBK Return ISBK Return BOP Return BOP Return Banking & Financial Services Companies Characteristics Lines On 29/04/2012 BOP s price was adjusted due to 11.67% stock dividends distribution. BOP Characteristic Line (1) y = 0.78x % -1-1 BOP Characteristic Line (2) y = x % -1-1 Banking Sector Return ISBK Characteristic Line (1) y = 0.79x ISBK Characteristic Line (2) y = 1.16x Banking Sector Return TNB Characteristic Line (1) y = 0.75x TNB Characteristic Line (2) y = 0.99x Banking Sector Return 9

10 PCB Return PCB Return QUDS Return QUDS Return AIB Return AIB Return Banking & Financial Services Companies Characteristics Lines - Continued 1 AIB Characteristic Line (1) y = 0.62x AIB Characteristic Line (2) y = 0.72x Banking Sector Return QUDS Characteristic Line (1) y = -0.09x QUDS Characteristic Line (2) y = 0.36x Banking Sector Return PCB Characteristic Line (1) y = 0.13x PCB Characteristic Line (2) y = 0.32x Banking Sector Return 10

11 PSE Return PSE Return PMHC Return PMHC Return PIBC Return PIBC Return Banking & Financial Services Companies Characteristics Lines - Continued 2 PIBC Characteristic Line (1) y = -0.08x PIBC Characteristic Line (2) y = 0.29x Banking Sector Return On 05/11/2012 PMHC s price was floated in consequence to non trading activity for a period of 6 months or more. PMHC Characteristic Line (1) 1 y = 0.01x PMHC Characteristic Line (2) 1 y = 0.21x Banking Sector Return PSE Characteristic Line (1) y = -0.02x % 1.50% 0.50% % % -2.50% PSE Characteristic Line (2) y = 0.01x % 1.50% 0.50% % % -2.50% Banking Sector Return 11

12 PRICO Return PRICO Return PADICO Return PADICO Return Investment Sector Light insight Company Symbol Al Quds Index 15 Months Beta Investment Sector Investment Sector bears a semi balanced weigh in terms of facing systematic and unsystematic risks. Some of these risks result from rising costs and intense competition forcing firms to reposition themselves in regional and world markets. Little foreign direct investment in Palestine due to the political risk in the region is also another reason. Palestine Development & Investment PADICO Palestine Real Estate Investment PRICO Palestine Industrial Investment PIIC Union construction and Investment UCI Al-Aqariya Trading Investment AQARIYA Palestine Investment & Development PID Jerusalem Real Estate Investment JREI Arab Investors ARAB In the investment sector in the PEX, PRICO operates a large part of its Investment Companies Characteristics Lines activities in Palestine. The unstable political and economic situation in the region increases the risk of the com- PADICO characteristic line 1 y = 1.56x PADICO characteristic line (2) y = 1.35x pany's activities, and negatively affect their performance and ability to recover its assets through their work. Also the company's assets include - investment in the tourism investment company "AL-Mashtal" where all its assets and operations are in the Gaza Investments Index Return Strip. In addition, the company's assets contained Real estate investment in the Gaza Strip. Also the unstable political and economic situation in the region increases the risk of UCI. PRICO characteristic line (1) y = 0.98x PRICO characteristic line (2) y = 0.58x AL-Quds Index Return Investments Index Return 12

13 AQARIYA Return AQARIYA Return UCI Return UCI Return PIIC Return PIIC Return Investment Companies Characteristics Lines - Continued 1 PIIC characteristic line (1) y = 0.50x PIIC characteristic line (2) y = 0.54x AL-Quds Index Return Investments Index Return On 15/07/2012 UCI s price was floated due to the GA decision to decrease the paid-up capital by 20%. UCI characteristic line (1) 1 y = 0.33x UCI characteristic line (2) 1 y = 0.41x Al-QUDS Index Return Investments Index Return On 15/07/2012 AQAIYA s price was floated due to the GA decision to decrease the paid up capital by AQARIYA characteristic line (1) 2 y = -0.23x AQARIYA characteristic line (2) 2 y = 0.05x % AL Quds Index Return - -1 Investment Index Return 13

14 Arab Return Arab Return JERI Return JERI Return PID Return PID Return Investment Companies Characteristics Lines - Continued 2 PID characteristic line (1) y = 0.07x PID characteristic line (2) y = 0.04x AL-Quds Index Returm Investments Index Return JREI characteristic line (1) y = 0.12x JERI characteristic line (2) y = 0.03x Investments Index Return Arab characteristic line (1) y = 0.01x Arab characteristic line (2) y = 0.02x AL-Quds Index Return Investments Index Return 14

15 AZIZA Return AZIZA Return BPC Return BPC Return Light insight Industry Sector is more affected by the systematic risk that represents the political and economic situation than the unsystematic risk that represents the industry sector risk itself. In the industry sector in the PEX, companies are affected by several risks due to their operations. AZIZA faces smuggling from Israel, where the company is competing with Israeli products sold in the Palestinian territories. In addition to the Israeli feed that still dominates over 80% share of the consumed feed in the Palestinian market. Another main risk could be generated from the poultry diseases. Also, GMC which is considered to be the largest wheat-producing company in Palestine, competes under with the Israeli companies and the imported wheat. Real or actual competition does not exist for GMC, where it is allowed for the Israeli flour to enter freely the Palestinian markets without any restrictions, while it is not allowed for GMC to sell in the Israeli market regarding to the limitations that have been forced from the Israeli side on the Palestinian products. In addition, there are no specific laws or quota that control the imports volumes per periods. Regarding the Pharmaceutical risk in the industry sector, particularly in BPC, the company is subject to the risks of competition in selling prices with other pharmaceutical companies in Palestine. In addition, BPC implements its main activities in Palestine and partially in Algeria and Eastern Europe, but the instability of the economic and political situation in Palestine may increase the risk of the company and may negatively affect its performance. Industry Sector Company Symbol Al Quds Index 15 Months Beta Industry Sector Birzeit Pharmaceuticals BPC Palestine Poultry AZIZA The Vegetable Oil Industries VOIC Golden Wheat Mills GMC Jerusalem Cigarette JCC Jerusalem Pharmaceuticals JPH National Aluminum and Profile NAPCO The National Carton Industry NCI Arab Company for paints products APC Palestine Plastic Industries LADAEN Al Shark Electrode ELECTRODE Industry Companies Characteristics Lines BPC characteristic line (1) - AL-Quds Index Return AZIZA characteristic line (1) - AL-Quds Index Return y = 0.60x y = 0.24x BPC characteristic line (2) - Industry Index Return AZIZA characteristic line (2) - Industry Index Return y = 1.86x y = x

16 JCC Return JCC Return GMC Return GMC Return VOIC Retrun VOIC Return Industry Companies Characteristics Lines - Continued 1 VOIC characteristic line (1) y = 0.30x VOIC characteristic line (2) y = 0.65x GMC characteristic line (1) y = 0.78x GMC characteristic line (2) y = 0.58x Industry Index Line JCC characteristic line (2) JCC characteristic line (1) y = 0.47x y = 0.87x AL-Quds Index Return Industry Index Return 16

17 NCI Return NCI Return NAPCO Return NAPCO Return JPH Return JPH Return Industry Companies Characteristics Lines - Continued 2 On 30/04/2012 JPH s price was JPH characteristic line (1) 1 y = 0.38x JPH characteristic line (2) 1 y = 0.33x adjusted due to 20% stock dividends distribution Industry Index Return NAPCO characteristic line (1) y = -0.21x NAPCO characteristic line (2) y = 0.18x AL-Quds Index Return Industry Index Return NCI characteristic line (1) y = -0.01x NCI characteristic line (2) y = 0.13x AL-Quds Index Return Industry Index Return 17

18 ELECTRODE Return ELECTRODE Return LADAEN Return LADAEN Return APC Return APC Return Industry Companies Characteristics Lines - Continued 3 APC characteristic line (1) APC characteristic line (2) y = -0.11x y = 0.113x + 6E AL-QUDS Index Return Industry Index Return LADAEN characteristic line (1) y = -0.03x LADAEN characteristic line (2) y = 0.08x Industry Index Return ELECTRODE characteristic line (1) y = -0.06x ElECTRODE characteristic line (2) y = -0.16x Industry Index Return 18

19 AIG Return AIG Return NIC Return NIC Return Insurance Sector Light Insight Company Symbol Al Quds Index 15 Months Beta Insurance Sector The insurance sector is less affected by the systematic risk since it is less correlated to the market index. Meanwhile, it is more affected by the unsystematic risk which represents the insurance risk itself. Some of these problems result from practices implemented by the insurance companies themselves, including price "wars" which led to prices being reduced much below the market value at the expense of the quality of service provided. Also, insurance companies may fail to abide by the regulations of the insurance controller. National Insurance NIC Ahliea Insurance Company AIG Global United Insurance GUI Al-Takaful Palestinian Insurance TIC Trust International Insurance TRUST Palestine Insurance PICO Insurance Companies Characteristics Lines NIC Characteristic Line (1) NIC Characteristic Line (2) 1 y = 0.21x y = 1.99x Companies may have either fail or being late in supplying accurate reports, data, and financial statements necessary for supervision by the controller, particularly concerning their accounts. This has prevented companies from having their performance monitored or measures taken against them to halt mistakes or violations. Control over the activities of insurance companies is poor; In addition, insurance tenders for projects granted by the Palestinian National Authority (PNA) have lacked clarity and transparency. Also, the lack of an insurance culture among individuals and institutions has resulted in low purchasing of insurance services, particularly car insurance, work accident insurance, and life insurance AIG Characteristic Line (1) 1 y = 0.32x Insurance Sector Return AIG Characteristic Line (2) 1 y = 1.64x Insurance Sector Return 19

20 TRUST Return TRUST Return TIC Return TIC Return GUI Return GUI Return Insurance Companies Characteristics Lines - Continued 1 GUI Characteristic Line (1) 1 y = 0.31x GUI Characteristic Line (2) 1 y = 0.19x On 01/04/2012 NIC s price was adjusted due to 20% stock dividends distribution Insurance Sector Return On 02/05/2012 AIG s price was adjusted due to % stock dividends distribution. On 20/03/2013 GUI s price was adjusted due to 12.5% stock dividends distribution TIC Characteristic Line (1) y = 0.21x TIC Characteristic Line (2) y = 0.19x Insurance Sector Return TRUST Characteristic Line (1) y = -0.05x TRUST Characteristic Line (2) y = 0.08x % - - Insurance Sector Return 20

21 PICO Return PICO Return Insurance Companies Characteristics Lines - Continued 2 PICO Characteristic Line (1) y = 0.02x PICO Characteristic Line (2) y = 0.02x Insurance Sector Return 21

22 Disclaimer This report is not an offer to buy or sell nor a solicitation to buy or sell any of the securities mentioned within. The information contained in this report were prepared using information available to the public and sources Sahem Trading & Investment Co believes to be reliable. Sahem Trading & Investment Co does not guarantee the accuracy of the information contained within this report and accepts no responsibility or liability for losses or damages incurred as a result of investment decisions taken based on information provided or referred to in this report. Any analysis of historical facts and data is for information purposes only and past performance of any company or security is no guarantee or indication of future results. Contact Details Sahem Trading & Investment Co, Ramallah, Palestine P.O.Box 2187 Direct line: or Research@sahem-inv.com Head of Research Majd Khalifeh mkhalifeh@sahem-inv.com Research Analyst Dima Razzouk drazzouk@sahem-inv.com Research Analyst Maha Tarazi mtarazi@sahem-inv.com 22