Where is the smart money going in 2011?

Gold has brought consistent gains for those who bet on the precious metal for the long run. The Property Fund and SIFs are also seen as keepers by specialists while the stock exchange is tipped to generate higher yields this year. Sectors like retail, healthcare and energy are also popular. But it’s not all roses in the investment garden. Retail specialists say the field has little room for newcomers, a completely different landscape from a few years ago. Healthcare remains fragmented, but takeovers are still expected, while the energy companies which have looked towards wind are hoping for improvements to the law which often stymies hundreds of millions euro worth of projects.

Dana Verdes, Otilia Haraga, Simona Bazavan

“Gold and silver are money. Everything else is credit.” These words, spoken by the American financier J.P. Morgan, were true then and are even truer now. Amid the global crisis of confidence, investors seem to have been re-discovering the benefits of gold as an asset: no credit risk, no liquidity risk, and it cannot become worthless.

So, in periods where “black swans” are not unprecedented occurrences, but are practically coming in flocks, the status of gold as a safe haven has yet again proven its worth.

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As evidence, gold has outperformed all other asset classes in the past ten years, gaining an annual average of 16.5 percent since 2001 (or 13.5 percent in Euro terms), wrote Ronald Stöferle, gold analyst at Erste Group in the Special Report Gold – In GOLD we trust.

According to him, last year the development was outstanding as well – the precious metal increased by 10.5 percent (in USD) or 28.5 percent (in EUR), respectively.

Drawn by these consistent returns, the Romanian market has seen its share of gold seekers. “Retail clients bought more than 150 kilograms of gold bars and 3,000 gold coins last year, worth some EUR 5.8 million, meaning average sales of EUR 480,000 per month. The largest sales were of 100-gram gold bars, over 55 kilograms, and of those of 50 grams with a total of 40 kilograms. Moreover, the average sale was EUR 3,600 per client, meaning 110 grams per transaction,” Alina Piciorea, head of corporate and retail sales treasury & financial markets at Piraeus Bank, told Business Review.

The lender is the only local commercial bank to sell gold through retail. It launched the product in October 2009, when it sold 30 kilograms of gold and 500 gold coins on the local retail market.

Elsewhere, Razvan Furtuna, chief of treasury product sales in the retail client department at Banca Comerciala Romana (BCR), told Business Review that gold sales had doubled last year compared with 2009 and are expected to register a similar trend this year.

“Erste sold financial gold worth some EUR 700 million last year, excluding the structured products. BCR traded financial gold and structured products with active support gold of EUR 40 million,” said Furtuna. Financial gold means the gold purchased for the establishment of a reserve and used as an investment tool.

Specialists say that a hike in gold demand from May-June and November- December last year was recorded amid the RON’s depreciation, fiscal measures announced by the government and pessimistic forecasts for inflation.

“As on the international markets, the demand for gold peaked during the winter holidays, when the largest monthly quantity – 26 kilograms – was delivered,” said Piciorea.

The Piraeus Bank official said that the profits enjoyed by clients reached some 15-20 percent, much higher than the payoff from typical investment instruments such as shares, deposits or bonds.

But who are these investors who bet on gold for consistent returns on the long run? The Piraeus Bank official says that the profile of the investor has changed over the years. “While the first clients were attracted by its accessibility and novelty, today’s buyers focus on larger quantities for investment purposes, in order to diversify their portfolio and to conserve its value,” said Piciorea. “Generally, these clients come from the business environment or liberal professions, are from 40-45 years old, live in cities and have average or high incomes. The youngest investor is 21 years old and the oldest is 71.” The BCR representative also mentions collectors who buy small gold bars and coins and those who give gold as a gift.

And it doesn’t seem that gold will lose its sparkle too soon. “We believe that gold still has growth potential, as the technical analysis and seasonality indicates a price correction (already confirmed) to USD 1,300 per ounce of gold,” said Furtuna.

The Erste specialist is even more optimistic. “My target prices of USD 1,600 per ounce until June 2011 and long term USD 2,300 are still in place,” said Stöferle.

Piciorea believes that gold will probably remain among the top performing assets this year. “The upward trend will be sustained by the financial support given to large states with considerable budget deficits and the EUR/USD evolution, which is directly correlated to gold,” said Piciorea.

She added: “Considering the monetary and inflationary pressures, our traders see the yellow metal as the most profitable refuge for investors in Q1 this year, heading towards a new historical maximum at around USD 1,600.The end of the semester could find gold at USD 1,420 per ounce.”

Despite the current strength in the price of gold, mining companies are predicting high gold prices to continue throughout this year, according to PwC’s 2010 Global Gold Price Survey Report.

“Given the high demand for gold, it will be interesting to see if companies that have located marginal deposits of gold will kick-start their production and move faster than they would under normal circumstances,” commented Alexandru Lupea, partner assurance services, energy, utilities and mining industry group leader at PwC Romania.

It remains to be seen if retail will get new wings based on how gold sales are regarded in Romania.

The Property Fund and SIFs – first ladies in the stock exchange

Cornerstones of the Romanian equity market in 2011 could take the form of two major events – the planned listing of the Property Fund (finally) and the announced plans to use the domestic stock exchange to launch SPOs for still state-owned stakes.

The listing of the Property Fund will help deal with the typical emerging market troubles, liquidity and size, according to information in Erste Group Research – CEE Equity Strategy, 1Q 2011.

“The Romanian stock exchange now has the chance to get on the map of several foreign investors as a result of increasing trading volumes, a very important indicator that has so far put off potential investors interested in Romanian activities,” Andreea Gheorghe, deputy general manager at Intercapital Investment Management, told Business Review.

Dragos Darabut, financial analyst at Tradeville, added that depending on the purchase price, investing in Property Fund shares could bring significant returns to shareholders.

“At a purchase price of RON 0.63/share and adopting a conservative approach regarding net profit in 2010 (RON 200 million) we get a dividend yield of 2.3 percent. The calculation was made with the 100 percent allocation rate, which the administrator has put to shareholders for approval,” said Darabut. 

Along with the fund’s listing, the SPOs of Petrom (a 9.84 percent stake), Transelectrica and Transgaz (both 15 percent stakes) should raise interest in the Romanian market. The IPO for Romgaz might attract further negative attention, since the company has been asked to ‘support’ budget consolidation needs. This could result in some bigger negative news stories in 2011.

“We became a bit less optimistic for utilities, since the impact of regulated tariffs is leaving its mark on corporate earnings. Transgaz should post weaker results at least in 1H11, with a substantial dividend yield still an argument for the stock,” said Henning Esskuchen, co-head of CEE capital markets research at Erste.

Transelectrica has very strong arguments for a positive tariff development, which results in a fine outlook for 2011 and 2012. SIFs in general remain attractive, given their large discounts (particularly measured against the market value of core holdings such as BRD).

“I expect this year to be a balanced one on foreign markets and positive for the Romanian stock exchange. I believe that primarily issuers such as the Property Fund and the SIFs from the BET index will capture investors’ attention, but medium and small capitalization companies with growth potential or good financial results will also be interesting as additional shares in retail investors’ portfolios,” said Gheorghe.

However, gloom still surrounds ownership limitations, and the listing of the Property Fund might overshadow the SIFs, say specialists. All other stocks worth looking at are mainly in defensive areas. This might be seen as appropriate for a market such as Romania. However, the flipside is that defensives might not be that much in focus in general and, secondly, most stocks are still small caps (Antibiotice, Biofarm, Albalact). Teraplast might be something to look at, with a view on utility infrastructure projects, although these carry the risk of being publicly financed.

Financial specialists expect yields to slightly increase this year.

“In 2010 we had returns of 14.6 percent on BET-C, while BET-FI decreased by 10 percent, weak developments for an emerging market, but reasonable compared to the economy’s results. Improving macroeconomic indicators this year will probably lead to more consistent growth on the stock exchange, between 15-25 percent,” said Darabut.

According to him, the main positive domestic driver is GDP growth. The evolution of the economy is directly proportional to the confidence of foreign investors, which did not invest large sums of money on the local market in the second half of 2010 due to uncertain economic environment.

“The resumption of talks on the increase of the SIF threshold or good news concerning the administration of energy companies Nuclearelectrica and Hidroelectrica are other factors that could positively influence the movement of the stock exchange. Compared with last year I believe that the risk of correction comes from outside rather than inside the market,” said the Tradeville representative.

Erste Group specialists say that in terms of investment strategy, making a share selection is recommended this year.

“We prefer companies from cyclical sectors, which have had a dynamic sales evolution on emerging markets and will benefit from those regions’ growth. The oil & gas companies estimate that they will have a better evolution in the first quarter. In general, raw materials should see a good evolution, because the liquidity will lead to higher prices,” said Esskuchen.

Erste Group analysts also doubt that sectors such as telecommunications and utilities will excite investor, given the shrinking expectations that they will generate profits.

To retail or not to retail?

Cautiously optimistic – this is the general state of mind of local retailers for 2011 so far. Fickle and penny-pinching shoppers, increased competition, discounting, shrinking profits and in some cases even the specter of insolvency make for a very different landscape than a few years ago. Nevertheless, the recession should not be all bad news, at least not in theory. Expansion plans are still in the cards, but different times call for different investment strategies and a more flexible and innovative approach to the

market.

 “Given the current economic dynamics we are expecting an overall stabilization of the Romanian economy but not yet a recovery or growth,” Michael Weiss, partner with A.T. Kearney, told BR. Consumption is not likely to pick up this year and this leaves little hopes for a rebound of the local retail market. “It will be more of a lagging industry compared to others,” he added.

Household consumption went down by 5 percent in the first nine months of 2010. “This decrease, which is the first in the past ten years, was a consequence of the salary cuts made in 2010 and inflation,” Raluca Raschip, consumer tracking director at GfK Romania, told BR.

Romanians bought fewer and cheaper products, pruning their shopping lists of non-essential products. Consumption of non-food FMCG products was reduced by more than 9 percent, according to GfK data.

In light of recent economic developments, 2011 will also be a year of cautious consumption. The Consumer Confidence Barometer developed by GfK Romania for the European Commission reached an annual average of -54 in 2010 and hit a ten-year low. “This will certainly translate into stagnation or even a decrease in consumption for some categories,” predicted Raschip.

Unenthusiastic consumption also means that over the coming years there will be a significant transformation of the way business is being handled. “Additional pressure on the system is expected from international investors and their ongoing activities to generate more synergies across the countries across suppliers but also market intelligence and retail formats,” Weiss said.

Compared to other countries, Romania is considered in the 2010 A.T. Kearney Global Retail index report as one of the most saturated and crowded market places. “We are expecting a further market clean up and change of ownership. (…)The room for newcomers is very limited – if at all we see this room on special niches but not on the classic retail formats,” he added.

Robert Maxim, managing partner at Ensight Management Consulting, also thinks that new retail formats are a must in order to resuscitate the market. “Compared to other European countries, local retail formats are monotonous and there are many other formats that haven’t been brought here.” In his opinion this shows the markets’ potential as well as its maturity or rather lack thereof.

In his opinion all non-food retailers should proceed with caution this year. “There is room for newcomers but the appetite for all non-basic products has dropped,” said Maxim, adding that the trend is likely to continue this year also. One segment that is bucking the trend in his opinion is innovative technology. “Anything related to innovative technologies is doing well but overall, the volumes are very small. This is only a niche market,” he added.

These are auspicious times for expansion, Maxim thinks. “We have positive signals from retail networks expanding and taking advantage of the opportunities brought about by the economic crisis such as cheaper land,” he said. Lower rents have proved to be the full side of the glass also for retailers active in non-food sectors.

“The level of rent can be a major deal breaker when deciding to open a new store. A few years ago, some developers had demands that were simply too high,” Augustina Artemie, head of marketing for Romania at German Deichmann, told BR. She added that as things are returning to normal the company is confident that it will continue to expand in prime locations countrywide. In 2010 it opened 14 new units bringing its local network to 36 stores.

C&A representatives agree that local expansion is linked to the availability and development of retail projects. “In the recent past a lot of projects were stopped or there were no interesting premises available. But we feel that the market is beginning to be revived, confirmed also by the number of new locations we plan to open this year,” Cristian Codrea, district manager Romania for C&A, told BR. The Austrian fashion retailer plans to open about eight more stores this year. “We are plotting a long-term course and a sustainable growth on the Romanian market because we believe in its potential. In 2011, we plan to open about eight new stores across the country, mostly in shopping center projects in large towns,” Codrea went on.

The available space in prime locations and long-term sustainable rents attracted tenants last year, Luiza Moraru, head of the retail department at CB Richard Ellis Romania, told BR. “H&M is the perfect example in this sense. This giant retailer analyzed the local market in early 2010 and based on the available space and financial terms which can be agreed, it decided to open as many as 10 stores in 2011,” she told BR.

In her opinion, the gap between prime and secondary spaces has widened in 2010. “Prime properties are in demand, the vacancy rate is going down and obviously the rental level has not suffered great fluctuations. Secondary assets are still struggling – consumers are either lacking purchasing power or have switched their shopping towards dominant centers,” she adds.

Last year modern retail stock increased by 195,000 sqm, coming from projects like: Atrium Center Arad, Gold Plaza, Sun Plaza and Cocor Department Store. This year new projects are underway in Bucharest and in other big Romanian towns and more retailers are putting Romania on their map. “H&M is the most well-known name, but Leroy Merlin, Montblanc and Subway are due to open units in 2011,” Moraru said.

The only segment that remained untouched by the crisis was fashion. Retail sales in clothing never stopped growing, according to a Candole report, and new names are expected to join the fray next year.

Investments needed across all sectors on ailing healthcare market

The Romanian private healthcare market is currently very fragmented and acquisitions will happen this year as well, which will lead to its consolidation, say pundits. This is a sector which offers plentiful opportunities for investment, in hospitals and infrastructure for medical services. “Looking at the current level of maturity – or should I say immaturity – of the healthcare market, I do not think there is a more or less interesting segment. There are already investment funds that have invested in both medical and pharma services, which proves there is a linked interest,” Dragos Dinu, partner in Link Resource, tells BR.

Since the market is still fragmented and undergoing consolidation, this year will bring as many, if not even more acquisitions on the market. At the moment, development strategies in both private medical services and pharma retail target national expansion, which puts many of the players on these segments into interesting positions that could catch the interest of investment funds or strategic investors,” says Dinu.

But which ones are targets for acquisitions?

“Most definitely the target of investment funds will be large private medical suppliers with a strong presence in Bucharest and locally, with experience on the market and very good financial results, with constant profitability and development from one year to the next,” Mihail Marcu, president of the MedLife administration board, tells BR.

There are also sectors that are only marginally covered by public health insurance and which have developed earlier than others, such as gynecology, in vitro fertilization, dermatology and ophthalmology,” says Dinu, while insiders from B Braun point to orthopedics and navigated implantology as big markets for future growth.

“Key areas for investment are hospitals and all medical service related infrastructure. Not laboratories – even though we have seen quite some activity here in recent years – but properly configured business models would have still sufficient potential in the market,” Michael Weiss, head of A.T. Kearney in Romania, tells BR.

Other areas of interest will be healthcare related services like “competitive and intelligent distribution models that should change the current outdated route to a market approach and on the mid term quality certification systems/services,” says Weiss.

However, he is not overly optimistic about the evolution of healthcare related IT solutions and the more complex medical equipment on the short term, due to budget constraints and the current regulatory approach.

Also for the same reasons, private health insurance systems as they are implemented on other EU markets will not be “a hot topic for the mass market in the short term,” he explains.

Additional ground for this theory is the fact that the state does not yet seem too eager to encourage collaboration between private and public health sectors. “One of the most important steps would be defining the minimum package covered by the compulsory state insurance, as well as fiscal facilities when taking out optional health insurance,” says Marcu.

While under the American model the state relies almost exclusively on the private health system, in Western European countries the ratio is 30-40 percent. However, in Romania it is only 10 percent, explains Marcu.

“Profit margins in this sector vary significantly across the different parts of the value chain, but also across the different business models within the same part of the value chain. This is a typical signal for the current premature status of

the system. We will see on the short term a redistribution of the margins across the current players and the value chain of the healthcare industry,” says Weiss.

A healthy term for recovering an investment is seven-eight years. “The profit margin is high, we are talking about 15-17 percent, but only in the case of integrated and complex medical systems; for small operators, it is 8-10 percent,” says Marcu.

It also depends on the degree of specialization that a certain service or medicine has. While in the cases of primary medical care and generic drugs, the focus is to offer/sell large volumes with a lower profit margin, things are different when it comes to more niche treatment. “Specialized medical services and drugs still protected by the patent include a much higher added value and will naturally have higher profit margins,” says Dinu.

But still, in the Romanian health system, as in many other sectors of the local economy at the moment, private investments are not what they should be. This is due to obstacles the state places in front of potential investors.

“Private investments could go much further than they go now if the state could guarantee the timely payment of treatments, both for the services and/or products provided by private companies.

As long as payment terms often exceed 300 days and the hospitals are heavily dependent on the so-called ‘arrears’, private investments will not be a major source of financing,” say B Braun officials.

The state is still lacking a strategy that would allow it to hone the public system. “Let us not forget that the state has not built any hospitals for more than

21 years and equipping the existing ones was done pretty chaotically and not based on strategic objectives but rather temporary political interests,” says Dinu.

The lack of adequate spending is an important factor in putting the healthcare system on the right track, which the authorities have so far failed to do. While the average European healthcare spending in 2008 was 8.3 percent of the GDP, Romania allotted only 5.3 percent of its GDP to this area, putting it bottom of all European Union states.

“From our experience in the market, this situation hasn’t improved in the last few years. Hence, it can be said from a macro-perspective that Romania is chronically underfinanced,” add B. Braun officials.

However, it is very important not only to have funds to invest, but to know where to invest. In Weiss’s vision, “the key issue in Romania is less the budget, as we can learn from other markets, but the political strength and will for a transformation that covers the complete system in a consistent approach.”

He says first and foremost institutional change is “urgently needed” and should be the focus.

“Based on our market insights there are several investors interested in participating in the Romanian system to develop it further – but not under the current set-up,” says Weiss.

At the moment, the concept of sufficient minimum healthcare standards in Romania as an EU member is far off. “Here I am talking not only about minimum services provided for all socio-economic groups but more particularly about the national coverage of efficient and minimum quality services for rural and urban areas. It is hard to imagine that with the current approach this target will be reached in the next five years,” he warns.

Another piece of this puzzle is that the Romanian health system is not yet sufficiently equipped to suit high-income patients, who are still travelling outside Romania to undergo treatment.

While Romanians are already used to paying out of their own pocket significantly more than patients from other countries, much of this outlay represents informal service costs to get access to the system. This means that “the current informal system has more money available than we can see in the reported statistics,” says Weiss.

Wind blows investors to Romania’s gates

With annual electricity potential from wind of 23 TW/h Romania has become an attraction for top international companies willing to invest hundreds of millions euro in wind farms. While at the end of 2009 there were just some 14 MW of wind power in operation, the figures increased at the end of last year when some 371 MW were registered.

Andreas Thomas, general manager Austria and Eastern Europe at Vestas Central Europe, identifies the opportunities that can make a company decide in favour of investing in a wind farm in Romania: high wind potential (estimated 14GW), over 4GW RES target till

2020, 500-600MW potential installations per year until 2018, the National

Action Plan 2010, attractive green-certificate (GC) supporting scheme, bank interest and the transport network – the Black Sea and Danube river ports and roads.

Currently, Vestas – which has recently opened an office at Bucharest – has sold turbines with a total capacity of 450 MW. The projects are all in the Dobrogea area in Baia 1 and 2 (17 MW), Pestera (90 MW) and Cernavoda (138 MW).

But the road from the idea to the actual construction and trading is long. Referring to the first stage in the construction of a wind farm, getting permission, Carlo Pignoloni, Enel Green Power Romania Bucharest  GM, said at Wind Power Romania, “Based on our experience, the time needed to achieve the building permit of the wind farm takes between 1.5 years and 2.5 years.”

According to him, the most relevant issues encountered in securing the land is fragmentation and confusion regarding land ownership – faulty retrocession, wrong or missing titles or constantly changing regulation regarding documentation. For public land the major issues are the unclear state of the law regarding the right of land usage title and lack of transparency for the joint-venture contract.

Currently, Enel has two ongoing projects: 34 MW in Agighiol and a first phase of 30 MW in Salbatica.

Consultant Markus Vrieling, CEO at Lamar Company, criticizes the bureaucracy. “Romania is no exception; other countries also have long development time lines and also too many rules and approvals. But approvals have no

value when they can be bought. Also, when politicians decide if a project will succeed, then nothing is sure,” said

Vrieling.Another issue is that the grid is overbooked with projects that are not

going to become operational. Yet the state-owned national electricity transport operator Transelectrica has announced future investments in network expansion, at least on paper, as financing of new transformation stations and for the modernization of existing network is hard to get during this troubled time.

According to Alexandru Sandulescu, energy department GM at the Ministry of Economy, in line for 2012 is some 1,700 MW at Tariverde power station, 600 MW at Vant power station, 354 MW in Moldova: Falciu Berezeni, Rosiesti, Vetrisoaia, Smardan-Gutinas, 105 MW in Tulcea County: Baia and Corugea-Cismeaua Noua, 90 MW in the Medgidia Sud area: Pestera and 120 MW in the Medgidia Nord area: Targusor and Silistea adding up to a total of 3,000 MW.

Another positive aspect identified by investors is the amendment of law 139/2010 adopted by the Romanian Parliament in July 2010 which confirms the adoption of a green certificate support scheme for renewable energy, even though the relevant secondary legislation that implements the law is still not in place.

An important aspect which the secondary legislation leaves unresolved is a surfeit of green certificates on the market.

Senior associate Ramona Volciuc-Ionescu at DLA Piper law firm told Business Review that the mechanism for taking over the excess green certificates proposed by the norms for application of the law on the promotion of renewable energy, which have been submitted for public debate until January 28, could be feasible only if other EU member states that fail to meet their renewable energy national targets are interested in buying the surplus renewable energy produced in Romania.

“Law 220/2008 requires the establishment, by way of a government decision, of the regulatory framework for cooperation between Romania and EU member states and third countries in order to implement joint projects for the production of renewable energy, for the method to take into account the quantity of energy produced as a result of such

joint projects towards the achievement of the national target for renewable energy, as well as the legal regime regarding the taking over of green certificates in excess,” said the DLA Piper representative.

Several scenarios regarding the taking over of surplus green certificates and securing at least the minimum price per green certificate have been put forward – for example, acquisition by Transelectrica, by the Romanian state or by the environmental fund.

The draft government decision published on January 18 proposes a mechanism through which the extra green certificates can be acquired and included in the statistical transfers organized between the EU member states.

“Under the envisaged mechanism, Opcom – the electricity market operator – would identify, on an annual basis, the surplus green certificates according to the notifications filed by the renewable energy producers.

The Ministry of Economy would search for other EU member states willing to acquire the quantity of energy from renewable sources at the annual average trading price on the national centralized green certificates market. If no member state is interested in concluding such an agreement, the superfluous green certificates would be used the following year when the procedure is reopened,” said Volciuc-Ionescu.