Bulls and bears
After last year's all time trading lows on the Bucharest Stock Exchange, traders didn't expect much in 2009.
The market was either going to sink a little bit further or slowly come back up – both of which have happened since the beginning of the year.
The year's first quarter saw a continuation of the disappointing trend that started in July 2007. “Driven by negative sentiment on the major exchanges in the US, Western Europe and Japan, the BSE's official index, BET, hit an absolute low of 1,887 points at the end of
February 2009, down 35 percent compared to the end of 2008,”
says Razvan Pasol, general manager of Intercapital Invest brokerage firm.
Other traders report similarly dismal findings. “January and February were a nightmare for investors. […] Despite some gains in March, the first quarter closed ‘on red', down 21.56 percent,” says Victor Safta, general manager of X-Trade Brokers Romania.
But this trend was reversed in the second quarter, due to better-than-expected figures regarding the outcome and duration of the international crisis. The BET index gained 45 percent between March and June, “as investor sentiment took a turn for the better,” says Pasol.
The same sentiment has also persuaded more foreigners to invest in the last few months. “There was a more visible presence of foreign investors in May and June, as the low prices made some stocks quite interesting to them,” adds Safta.
Some stocks have recorded price increases since the beginning of the year, which was not unexpected, considering last year's low levels, but the stock market did not see a significant increase in liquidity, indicating uneasiness about equity investments. “With average daily trades of only RON 26 million in the second quarter of the year (around EUR 6 million), liquidity on the BSE was only a little over a third of the value for 2007,” says Pasol.
Investors mark speculative gains
With a lack of any clear increasing trend on the BSE, speculative gains were the main highlights. “By the mid-point of the year things were very good for the BSE, compensating for a difficult beginning of the year. The market had high liquidity and volatility, which made it possible for experienced investors to post speculative gains,” says Claudiu Simulescu, general manager of Fairwind Securities. “The market evolved unexpectedly well,” he goes on.
But for others, it was even worse than expected. “We did have a pessimistic scenario in place and we anticipated a massive sell-off, but the drop was larger than our estimates. Non-residents closed their positions very rapidly and because they hold more than 50 percent of the Romanian equity market, prices tumbled dramatically,” says Safta of X-Trade Brokers. When that happened, the Romanian market found itself out of buyers almost instantly.
“Some good financial results or a 1 percent holding limit for SIFs were events that could, in a healthy market, have boosted prices and volumes,” says Safta.
Some may have lost more money on the BSE this year, others may have pocketed some, but the low trading volumes and the high number of brokerage companies on the local market did not make a successful mix. Brokers too have faced tight financial conditions, and pundits predict that some will go bust.
“We are now dealing with more than 70 brokerage companies on a market that trades a couple of million euros daily, which is not normal. Most of them will either go out of business or merge with others in order to survive. In Poland, for example, there are around 20 brokerage companies in a market that trades almost EUR 500 million daily,” says Safta.
Mooted short selling could stir market
There are high expectations for the second half of the year, as investors start the summer hoping H2 will be better than H1. “During the summer we expect a period of correction due to the low liquidity,” says Simulescu. After the bull run between March and June, Pasol expects prices to fall. “Besides the general negative outlook for the financial crisis, stock prices will also be influenced by reduced investor interest in trading during the summer vacation months,” he adds.
Major investors may return to the market in the last months of the year, although not in significant numbers, Pasol predicts.
Safta agrees, adding: “Actually we are now prospecting the BSE for an investment fund located in Poland willing to put a few million euros into Romanian equity.”
The second half of the year will also bring a debut on the local stock market. A form of short selling has been approved by the Romanian Central Bank, although it also has to be given the green light by the stock market regulation bodies in order to come into force. “The second half of the year will be challenging due to the launch of short selling, which will stimulate an increasing number of transactions,” says Safta. He is confident that not only the new products, but also the low prices will lead to increases in trading volumes on the BSE.
Short selling, which will be introduced in Romania for certain listed shares, is the practice of borrowing shares. Brokers lend shares to their clients, who then sell them at their present value, with a pledge to buy the shares back at a later date.
They then hope the price will tumble in the meantime so they can make a profit.
Caution is, however, still advisable. “Until we see clearer signs that the recession is easing, stock prices will continue to be volatile and fluctuate significantly in the short and medium term. While the current context may create interesting opportunities for speculative investors with short-term strategies or for long-term investors (of two years or more) buying stocks at today's low prices, risks remain high on the market,” says Pasol.