State bonds: panacea or too little too late?

Pension fund administrators and insurers were happy to finally welcome state bonds on the BVB this week. In troubled times like these, state bonds and bank deposits have been their main safety net so far and it was about time that the administration stepped up and lent a helping hand to the system, they said. Additionally, state bonds will “increase the market's transparency, stabilize BVB indexes, increase the number of investors interested in the capital market and cut their costs,” in Vosganian's words.
“For now, we can estimate that the liquidity in state bonds transactions will reach 20 percent of the total secondary market. The interbank market will continue to be the main one,” said Vosganian. Still, in spite of the official enthusiasm, analysts remained skeptical about just how much state bonds will actually benefit the stock exchange. Most agreed that their listing comes too late and will do close to nothing to stop BVB's rot.
“Sadly, state bonds come at a time when there is no one left to benefit. They would have been more useful when the crisis kicked off and investors could make the switch from shares to state bonds. Now, the damage is done: those who lost, lost and those who sold their shares exited the market or came back and invested in shares once again. Few people could greatly benefit from state bonds now,” said Marius Pandele, head of research with Vanguard.
He concluded that state bonds will probably not have a great influence on BVB's evolution in 2008. However, they will be useful for future times of recession on the BVB. That, is of course, if the Finance Ministry resorts to these indebtedness instruments more often than it has done so far. Andreea Ciobanu of Intercapital Invest agreed that any effect that state bonds will have on the BVB will be felt later. “I doubt that the listing of state bonds will have an effect on BVB indexes. However, on the long term it will have positive consequences and attract new big investors on the stock exchange,” Ciobanu said.
Bonds or no bonds, the stock exchange now needs all the help it can get. BVB's tumble-down performance charts blew out their one-year candle last week. Investors reminisced over old-time gains and present losses. The BET index [measuring the average performance of BVB's most liquid shares] has gone down in excess of 38 percent since the beginning of the year, while the BET-FI index [of the five financial investment companies – SIFs] would have to go up 120 percent to reach the value it had at the beginning of the year. “I doubt that we can imagine that a 62 percent growth in the BET or a 120 percent growth in SIFs [necessary to reach January levels] will occur in less than one year, although prices are very low right now,” said Pandele. A short-term comeback might still take place soon because prices have dropped very low and many investors are attracted to the idea of buying at the current rates.
“It remains to be seen whether this will be a smart move or they will have the same fate as those who bought shares at the beginning of the year attracted by share prices then. But the comeback might take a while to happen. Although the local stock exchange is characterized by a high volatility translating into abrupt drops and equally abrupt increases, it would be difficult to see such a significant high in less than a year after an upward trend has set in,” added Pandele. Ciobanu remained equally unconvinced of BVB's chances of a fast recovery. “At this point, it is quite difficult to say when share prices might go up again. What is certain is that macroeconomic indicators for the great world economies show no sign of an improvement and great financial institutions are posting losses,” said Ciobanu. The happy event of a rapid comeback is even more unlikely considering how badly the BVB was hit compared to other regional markets.
Two factors contributed to BVB's almost unparalleled disgrace in the region [Bulgaria also took a hard blow this year]. First, the market's stage of development. Secondly, the macroeconomic state of the country. “The market's lack of depth manifests itself on two levels. BVB has a very small number of issuers and their free-float is limited. The BVB also offers a limited number of financial instruments,” said Pandele. As regards poor macroeconomic indicators, they could not be counteracted by Romania's solid growth in the first quarter. “Although Romania does have economic growth it also has plenty of dysfunctions and is extremely vulnerable. Indicators like the commercial deficit or the current account deficit are particularly relevant. The vulnerability reflects on Romanian companies, including the ones floating on the BVB,” said Pandele. The only regional market to have posted losses comparable to the BVB was the Bulgarian stock exchange, said Ciobanu. The two stock exchanges echoed their countries' economic difficulties and had a disproportionate reaction to an otherwise remote crisis. “As expected, the ‘transition twins', Romania and Bulgaria, reacted in a similar way, not just in terms of corruption or macroeconomic problems,” said Pandele.
What could now get the Bucharest market out of the abyss are three things. State bonds are not among them.
One would be to see more private companies floating on the BVB, something that is highly improbable this year. The second one would be to have the state intervene, but that is equally unlikely. “The state did not provide any news regarding any listings and private companies prefer to wait for better times. Let us see how the preparation process for the listing of the Henri Coanda airport goes. This is the only issuer that might have any chances to float on the BVB this year,” said Pandele.
Ciobanu said in the current context, IPOs are in no hurry to show up on the stock exchange and many of the companies that had announced their intention to be listed this year are now postponing it, which might prolong the turmoil.
The third thing that could overturn the BVB's state right now is out of local hands: a change in the international context. That change could be anything from a drop in the price of oil to a halt in the fall of real estate or financial markets.
Since all of the three factors have fair chances of being delayed or never happening at all, the fate of BVB investors – either loss-stricken or seeking to tap the market now, at what they believe is its lowest point – seems to be beyond knowledgeable predictions. Their gains appear to now depend on the exact thing investors are told not to rely upon in capital market manuals: sheer luck.

By Ana-Maria David