BVB must wait to count its losses

Eight months after the indexes of the Bucharest Stock Exchange (BVB) hit historical highs we can safely say that we are indeed dealing with a capital market crisis. Not just in Romania, but worldwide.
Locally, we should point out that throughout the crisis shares that theoretically had more potential for growing actually had some of the worst evolutions.
I am mainly talking about financial investment companies (SIFs), since the BET-FI index (measuring their combined performance) plunged the most compared to all of the other BVB indexes. Real-estate developer and contractor Impact is in the same situation, although it activates in one of the most dynamic economic sectors in Romania. State-monopoly Transelectrica and lately even BRD, which has a share of about 16 percent of the banking market, are two other similar examples.
We are also seeing that the companies most badly affected by the crisis were not necessarily those already listed on the BVB. Rather, they were the companies which had scheduled an Initial Public Offering (IPO) for this period. The best example is that of the STK Emergent investment fund. Its IPO price – probably decided upon before the market’s decline at the beginning of the year – kept investors away and thus just 42 percent of the offer was subscribed.
Aside from STK’s case, there are also companies who considered getting listed these months and had to postpone it, like Teraplast Bistrita.
In both cases, money is lost. STK had to cover the expenses of a listing that got it less money that initially planned, which translates into a higher cost of capital. Companies who delayed their listing will have to alter their financing plans and this might have negative effects on their activity.
As a paradox, even though we are now passing a very negative period for BVB, the number of companies getting listed is higher than in good times.
The new listings, especially those of Erste Bank and Transgaz, improved BVB’s situation, at least as regards the market’s total capitalization. BVB’s capitalization dropped by merely five percent since the start of the decline because new listings compensated for other issuers’ drop in value. The portfolios of foreign investors who did not exit the market on time suffered the biggest losses, as BVB’s dive coupled with a drop in the RON-EUR exchange rate, and the effect was devastating for those that got caught in the middle. Foreign investors who had bought SIF shares were most badly affected.
The value of their stocks, calculated in euro, practically halved in the July 24, 2007 – March 18, 2008 period, when the BET-FI index dropped by “only” 40 percent. Right now, the question on everybody’s lips is whether BVB’s plunge will continue. The answer depends on the same factor that produced the crisis in the first place – the global economic situation.
If things stay how they are now, it is likely that investors will pay more attention to Romania’s widening current account deficit, its untamed inflation and the fragility of local companies than to its economic development, the business growth opportunities and the small prices of the shares. Still, a positive nudge from abroad would certainly have spectacular results.

By Marius Pandele, Head of Research with Vanguard