Small even by regional standards, Ecuador’s two stock exchanges play by their own rules

By Matthias Baumgart

Stock market investors were in for a rough ride last year. Major indices were down, some significantly. A number of relatively small regional stock exchanges, however, outperformed their much more famous counterparts. Ecuador has two stock exchanges: Quito (Bolsa de Valores de Quito, BVQ) and Guayaquil (Bolsa de Valores de Guayaquil, BVG). The Ecuadorian stock market has largely led a life of its own over the past few years, decoupled from economic ups and downs elsewhere. In spite of the existing market turmoil, first caused by the pandemic and, more recently, the Russian invasion of Ukraine, inflation and higher interest rates, the EcuIndex, the country’s main stock market indicator, finished 2022 up 6.9%.

The trading desk at the Quito Stock Exchange. (Photo courtesty of Quito Stock Exchange)

The Ecuadorian market is tiny even by regional standards. Local trading volume, in absolute terms and as a percentage of GNP, represents a fraction of that of its much bigger neighbors Colombia and Peru. Fixed income, attractive because of the high yields and stable income it offers, accounts for about 99% of all transactions by volume. Corporate bonds, in turn, make up roughly 2/3 of Ecuador’s bond market and domestic government bonds the remainder. Bonds in particular cater to the rather risk-averse Ecuadorian investor which explains why stocks have led a rather shadowy existence in the past. They represent just 1% of all transactions. Among them, shares of Corporación Favorita (owner of Supermaxi) are by far the most liquid with shares changing hands almost daily. Counting more than 18.000 shareholders, Corporación Favorita is also the only national company that so far has managed to appeal to a broader investor base with its own employees and their families figuring prominently among them. Other well-known listed entities are banking stocks (Banco de Guayaquil, Banco de Pichincha, Produbanco), the brewer Cervecería Nacional (now majority-owned by Anhaeuser Busch Inbev) and cement manufacturer Holcim Ecuador, the local subsidiary of Swiss building materials giant HolcimGroup.

As is the case with most emerging stock markets, Ecuador’s offers the investor a relatively high risk – high reward profile. Foremost among the market risks is its illiquidity. Cuenca’s well-known tiremaker Continental Tire Andina (the listed local subsidiary of German automotive company Continental AG), for example, has not recorded a single transaction for about a year.

Trader work stations at the Stock Exchange. (Photo courtesty of Quito Stock Exchange)

Other obstacles for retail investors include a burdensome and intrusive process to register with a broker (casa de valores), which by law are the only authorized intermediaries to buy and sell securities of any kind. All of them are head-quartered in Quito and Guayaquil. At present, only one has a physical presence in Cuenca. Despite laudable efforts by the local exchanges, electronic trading is still in its nascent stages. This however, might well be considered an advantage by some as it tends to shield markets and investors alike from the sometimes-excessive volatility and speculative drive observed in developed markets. A stock transaction here usually takes 3 business days to settle and even longer until the shares are deposited into Decevale, the central registry holding investors’ shares. All company securities traded on the national exchanges are digital or electronic shares now, “desmaterializado” in Ecuadorian Spanish. Investor relations, although generally improving, in some listed companies are non-existent and it takes a great deal of effort on the part of the investor to round up all the necessary information before an informed investment decision can be made.

The websites of both stock exchanges offer daily stock quotes and detailed (but scattered) statistical information along with relevant news about each listed company. A fair command of Spanish, however, is indispensable as neither exchange provides information in English.

Last but not least, transaction costs often amount to several times what investors pay in developed markets; as a rule of thumb, a 1% commission over the net transaction value (share price times number of shares) is charged by almost all brokers with $50 being the fixed minimum commission. It may be argued that this money is wisely spent, especially for the first-time investor in Ecuadorian shares. Brokers will guide the investor through the initial paperwork and advise them about market specifics and particular share indicators. In addition to the broker’s commission, both BVQ and BVG levy a rather modest 0.09% on each transaction (NTV).

On the reward side, most of Ecuador’s listed companies feature comparatively low price-earnings ratios and attractive dividend yields which in some cases may well reach double digits. Very few, Corporación Favorita among them, also opt to distribute bonus shares along with the annual dividend while share buybacks are not common. These companies, elsewhere known as “dividend aristocrats”, have a proven history of sustained earnings and payouts even during difficult political times and unfavorable economic conditions. While a thorough reform of the rather antique legal framework governing — and limiting — Ecuador’s securities’ market appears to have been shelved for now, opportunities for the courageous investor with a short to medium-term view should remain intact.
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Matthias Baumgart spent most of his professional career with German industrial conglomerate Siemens. In Ecuador, he was a lecturer at the Faculty of Economics at the University of Cuenca. He holds a brokerage and investment diploma (Quito Stock Exchange/Universidad Espíritu Santo Guayaquil).

The local brokerage mentioned in the article, in collaboration with the author, is organizing a workshop on investing in Ecuadorian securities. Interested readers may register and obtain more information about the event by emailing their contact data to stocks_ecuador@outlook.com