After a strong start to the year, with wide increases in January and the floating of liquidity driver Fondul Proprietatea (FP.RO), 2011 looked like a year of consolidation and increased turnover on the Bucharest Stock Exchange.
However, to the dismay of many, 2011 ended a two-year upward streak, where the bourse recovered some of the heavy losses taken during the 2008 and early 2009 crisis.
The market entered a downward slope in April, in line with foreign markets, and it has returned to the levels seen in the final quarter of 2009, struck by the spiraling sovereign debt crisis sweeping across Europe and the US.
“We should not be so upset by this development on the local market, because the situation across the globe, but also in the region, was tougher. Austria, a country with wide exposure in Eastern Europe, took by far greatest blows amid declining stock prices,” said Alexandru Constantinescu, trader with brokerage firm Swiss Capital.
For example, the Vienna bourse’s main index lost some 35% since January, while the Bucharest bourse’s BET index dropped 18% in total.
Wider declines compared to Romania were seen by the stock exchanges in the Czech Republic (-26%), Serbia (-23%), Poland (-21%) and Hungary (-19%). At the same time, the Stoxx600 pan-European index, dropped some 13%, while the European emerging markets index recoiled some 19%.
On the other hand, Wall Street’s Dow Jones Industrial Average increased by some 5%.
Brokers believe the decline will continue until mid-2012, after which there might be a recovery period, which should keep the market in the green until the end of the year. However, the recovery depends on sevral factors, such as a solution to the euro area debt crisis, the maintaining of fiscal prudence in Romania and success in the IPOs planned by authorities for state-owned companies.
The head of the capital markets research department within lender BCR, Mihai Caruntu, expects the stock market indexes to gain 10%-15% next year.
At the moment, the fundamental data do not point to a global recession, said Swiss Capital’s Constantinescu. However, he does not rule out a brief recession period for euro area countries, with mild impact on the stock markets.
“If we look back, the 2008-2009 recession was strongly felt on the stock markets in the first part, when Lehman Brothers went bankrupt. The strong declines of the gross domestic product in the first quarter of 2008 did not have a strong impact on the bourses, because investors anticipated the bad data,” Constantinescu explained.
Estimating a sudden recovery such as the one in 2009, investors looked towards speculative investment, with short term yield.
In the second half of the year, some of the investors withdrew in a bid to conserve capital, as markets dealt with high volatility and rising. Abrupt shifts were seen even within one day’s session, determined by political decisions and the announcements of rating agencies.
Thus, the stock exchange’s turnover began to shrink, after reaching peak levels in the beginning of the year.
Intercapital Invest trading manager Mihai Muresian said investor caution is natural since some of the stocks declined as much as 95% in 2008-2009.
Although the floating of Fondul Proprietatea drew the attention of large foreign players, these investors traded in this stock alone.
Brokers believe a way to revive investor interest on the Bucharest bourse would be to have successful public offerings for companies such as Petrom (SNP.RO), Romgaz, Transelectrica (TEL.RO), Transgaz (TGN.RO) and Tarom.
The main event for next year will be the listing of state-run gas producer Romgaz, an IPO estimated at some EUR300 million, according to the BCR analyst.
“There are conditions for success here, even if the Government delays by several years the alignment of local gas prices with the Russian prices. Romgaz is constantly seeing annual net profit of more than EUR100 million, and the convergence issue will help sell the IPO,” Caruntu explained.
On the other hand, he believes the Nuclearelectrica and Hidroelectrica IPOs are impossible to launch sooner than 2013, because these companies’ profitability dropped way below potential following their “non-commercial” electricity sale practices.
“In 2012, the government needs to show that it can change something in the commercial practices on the electricity market and the two producers need to sell progressively larger amounts of electricity on the OPCOM market, at competitive prices,” the analyst said.
A downturn in the global economy might cast a shadow on the success of these offeings, if authorities fail to understand that they need to set an acceptable price for investors, said Muresian from Intercapital Invest.
“Investors will be extremely cautious when investing in a moment when the economy is contracting. In order to be successful, these offers need to be adapted to the current market conditions, without any unrealistic expectations,” the broker said.
For next year, in a scenario where foreign bourses make a comeback, brokers would target companies on the financial segment, with expectations that the recovery will be as swift and wide as the downfall.
At the same time, the brokers recommend the shares of companies with a solid image, good results and large dividend potential in 2012. Such companies include Petrom, Transgaz, Transelectrica and Azomures (AZO.RO).
“We might see some big moves, especially on the SIFs, which are now drawing investor attention since their ownership caps were raised, but also because their upcoming dividends will reflect their BCR stake sales,” the Intercapital Invest broker said.
A first signal on the evolution of global markets might come in January, when Standard&Poor’s (S&P) might announce downgrades for 15 euro area countries.
The BCR analyst believes a potential reduction in the ratings of several euro area countries will not have a significant impact on the markets, since investors are already planning for such a development and current prices point to potential downgrades.
The Swiss Capital trader agrees the downgrades will not have a significant impact on markets, although such a decision might beget volatility.
“We might see some more volatility generated by the news on budget deficits and public debts of states that slid on these aggregates, and we could see new downgrades. However, as European Central Bank president Mario Daghi said, we should not rely so heavily on these agencies,” Constantinescu added.
Brokers believe Romania’s rating might be pressured if the government fails to observe the fiscal consolidation and structural reform targets, or if foreign deficits rise.