On developed markets, legislative elections and presidential ones are a turning point for investors, a time of portfolio readjustment and could even trigger strategy changes if a new political majority is formed.
Before November’s US presidential elections, analysts bet on the growth of healthcare companies if President Barrack Obama was to win a second term and on a rise of the weapons industry if Mitt Romney was the winner. After Obama’s win, the New York stock market fell because Republican Romney was closer to Wall Street.
But nothing happened on the Bucharest stock exchange, although the partial results of show that USL, made up of social-democratic party PSD and the liberal party PNL, has won a significant majority in the parliamentary elections–around 60% of the votes, which indirectly means that a new governing program will decide the future of the Romanian economy over the next four years. And fund managers say they don’t expect certain stocks or sectors to be driven up by the new parliament.
“In the US, Obama’s victory had a positive impact on healthcare companies thanks to the ‘Obama Care’ program in which the president committed to increase the access of Americans to medical services. In Romania we cannot say the shares of [Romanian drugmakers] Antibiotice (ATB.RO) or of Biofarm (BIO.RO) will rise because USL has committed to take care of Romanians through social-democratic measures,” said Dan Popovici, investment manager at asset management company OTP Asset Management.
However, looking at the stock exchange trends of the last four years, one can see how political decisions have strongly influenced certain shares. For instance the appointment of US group Franklin Templeton as manager of Fondul Proprietatea (FP.RO) and the fund’s stock exchange listing, which were political-supported, drove the price of the fund’s shares significantly up.
If someone had bought shares in the fund in November 2008 from the grey market at an average price of around RON0.1 per share, would have multiplied their money seven-fold from the increase in the share price and from dividends.
The future trend of the fund’s shares also depends on political decisions because in order to increase the value of the fund it is necessary to list the main companies in the fund’s portfolio (Romgaz, Hidroelectrica, Nuclearelectrica). The rise of SIFs was also helped by Parliament’s decision to raise the holding cap from 1% to 5% in December 2011, allowing shareholders to consolidate their stakes and to attempt to change managers.
SIF presidents, many of them politically appointed during the ’90s, managed for a long time to keep the cap from being raised, using the influence they had, particularly in PSD (Social Democratic Party, part of the winning USL alliance).
The cap was raised following a 2009 initiative of Arad senator Ovidiu Marian, formerly of PD-L (Democratic Liberal Party), but who has now won a new mandate with USL.
Political decisions also have a major impact on energy companies. For instance, the liberalization of the natural gas prices could drive OMV Petrom’s (SNP.RO) profit up, but politicians could decide to levy additional taxes on the profits made by the companies from liberalization, which could have a negative impact on Petrom’s shares.
But with the exception of a few sectors, the Bucharest stock exchange does not reflect the structure of the economy.
The Romanian bourse is dominated by companies in the financial and energy sectors and lacks issuers in retail, car market, agriculture, telephony and IT – segments with a significant share in the GDP. The better represented economic sectors are on the stock exchange, the more sensitive it becomes as a barometer of the economy and the political spectrum.
“The stock exchange has structural problems that keep it from responding to what is going on in the political world. It is not politicians who will solve the problems of the stock exchange. Brokers, the management of the bourse and [market watchdog] CNVM have to get involved in order to turn the stock exchange into a financing instrument for the economy, or else the bourse risks disappearing,” said Rares Nilas, general manager of brokerage firm BT Securities.
Another reason for the lack of impact is the fact that political parties themselves don’t have a coherent economic strategy.
Adrian Tanase, general manager of asset management company ING Asset Management and the manager of the largest equity fund, explained:
“I cannot cite companies or sectors on the stock exchange whose trend has been influenced by the political color of the government in place. So far political actions in Romania have not revealed a clear difference in terms of ideology so that investors could predict clear consequences on the economic world or on companies, based on the political color of decision makers.”
Rares Nilas added: “It is not very clear what the economic program of the future government will be like. Will a left-leaning, social-democratic doctrine dominate, or a right-wing, liberal one?”
However, Tanase of ING sees the 60% majority obtained by USL as an advantage for the capital market because it should in theory ensure political stability.
“Thanks to the much stronger Parliament support, I expect the new government to be able to initiate and implement important economic measures much faster and much more efficiently, and this would also have a positive impact on the Romanian capital market.”
Stock exchange investors are very eager to see the privatization program continued, as it is expected to resuscitate the stock exchange.
“In order to develop the capital market, it is very important to continue the program of stock exchange privatizations. I think as political pressure has disappeared, this program will be sped up. Extending the agreement with the IMF in March 2013 also plays an important part,” Tanase of ING also said.
This year, investors placed their hopes with the program of announced public offers, whereby companies such as Romgaz, Hidroelectrica and Nuclearelectrica were supposed to be listed on the stock exchange. But their hopes were dashed, with the state conducting only one secondary offering, in which it sold 15% in Transelectrica (TEL.RO). The initial offerings at Hidroelectrica, which is still insolvent, Nuclearelectrica and Romgaz, as well as the secondary offering at Transgaz (TGN.RO) have been put off. Investors are hoping the state will approach the deals in 2013.
Investors’ biggest fears over the future government have to do with taxation, as well as with President Traian Basescu and the current Prime Minister Victor Ponta pursuing their conflict. The next few weeks are decisive for the trend of the economy because President Basescu is due to designate a prime minister. The PM then has ten days to form a government, come up with a government program and go to Parliament for validation. USL has a 60% majority in Parliament and wants the president to keep Victor Ponta as prime minister. If this doesn’t happen, it has threatened to again impeach the president.
Basescu’s impeachment in the summer and the staging of a referendum on whether to oust him from power had a strong negative impact on the Romanian leu, whose official exchange rate hit an all-time low of RON4.6397 against the euro on July 27.
“The stock market, the exchange rate and the yields on treasury bonds will stand to gain if the government is formed quickly and with as little political noise as possible because this is a signal of stability sent to foreign investors,” Popovici says.
(English version by Daniela Stoican)