In highly developed markets, it would amount to a stock-market crash.

Meteoric rises in stock values on Balkan stock exchanges registered through early 2007 petered out in May. This month, while in some markets prices flattened, in others late spring and early summer brought falls as steep as 26 per cent.

Yet in the rough-and-tumble Balkans, unfazed analysts say this is no crash. Instead, they describe a market with substantial room left for further growth.

Meanwhile, in anticipation of the appearance of new investment funds, they forecast growing demand for shares.

So if this is not a crash, what is it? Analysts say the price slump is indicative of an important but not fundamental shift in the character of Balkan stock markets.

Amid the short-lived euphoria of recent years, some buyers began wondering whether their short-term capital gain would be merely big or genuinely huge.

With some share prices in the region’s most upwardly mobile markets rising by many multiples, a sizeable gain of, say, 30 per cent, could actually look disappointing.

But corrections such as the current one - not the first, but among the biggest the Balkan stock markets have experienced so far - cause such temptations to fade.

Market experts now say they never considered the euphoria sustainable.

“I am not alarmed at all,” said Sarajevo Stock Exchange director Almir Mirica. The market is “cooling off” naturally as feverish demand dies down, but investors do not seem to be backing off, he says.

In the first five months of 2007, leading stock indices in Croatia, Bosnia-Herzegovina, Serbia, Montenegro and Macedonia rose rapidly. Top performers were found in Montenegro, where stock exchanges in Podgorica registered an incredible 160 per cent jump in value. Such was the surge in demand that, through May, turnover in 2007 exceeded total turnover from 2007.

Since then, the “cooling off” effect has been most conspicuous in Sarajevo, where values slipped by 26 per cent. It was least noticeable on the Macedonian stock market, which fell by just three per cent.

Despite the recent slide, stock exchange indices remain significantly higher than they were in January. Though indices in Montenegro fell sharply from their peak, they remain 130 per cent higher, while Serbia’s leading index, at the Belgrade Stock Exchange, remains 55 per cent up.

Short-term perspectives

The slide may be due partly to the behaviour of short-term investors.

“Nervous investors who have been selling their stocks with the intention of make a profit as soon as possible are likely to have influenced the fall in stock exchange indices,” Mirica says.

Speculative investors such as those Mirica describes aimed to cash in on market growth without waiting for companies in the region to grow substantially stronger.

Some economists in the region argue that the entry of such investors has been premature. Ante Domazet, an economist at the University of Sarajevo, is among those who argue that a better time for investors to enter will arrive when company results converge with stock performance.

Yet reasons remain to expect strong upward demand shocks in the future, such as the emergence and growth of Balkan investment and pension funds. The growing presence of large-scale investors such as these will, in turn, boost demand for new share issues as companies exchanges compete against banks as sources of fresh capital.

Adding to the long-term potential for growth is Balkan countries’ gradual movement toward membership of the European Union. Bulgaria and Romania joined the EU at the beginning of this year, leaving six Balkan countries outside the bloc, of which the closest to the EU are Croatia and Macedonia.

Goran Bakula, a Zagreb-based economist, predicts a new wave of “euphoria” and “artificial inflation” as other Balkan countries join the EU, though accession for additional countries is likely to be years away.

The ‘Kladionica Effect’

Of those hit hardest by the recent slump, none have been more susceptible than the short-term speculators - risk-loving investors in search of quick and easy profits.

In some Balkan economies, such dabblers have brought to the market what might be called the “kladionica” effect, after the south Slavic word for betting parlour.

Montenegro stands out in this respect, as its deeply ingrained gambling culture adapts to new market realities. Instead of analysing bookies’ odds on football games over morning coffee, keen gamblers have taken to eyeballing stock exchange fluctuations and swapping rumours about company news.

“There are wagers placed on stock markets all over the region,” says Lazar Janinovic, a broker at Holder Broker, a Montenegrin brokerage.

According to estimates made by the Montenegrin Securities Commission, some 10 per cent of Montenegrins actively trade shares, an exceptionally high percentage for the region.

Bakula, the Zagreb economist, says such widespread participation strengthens domestic capital markets but adds a degree of irrationality. In Croatia, a recent buying spree of shares in INA, the Croatian oil company, generated long queues as buyers crowded into banks. The INA case may illustrate Bakula’s point.

Even in Bosnia-Herzegovina, where fewer people dabble in stock trading, an unscientific survey of individuals in downtown Sarajevo turns up evidence of the practice’s growing popularity.

Adil, a waiter at a cafe, admits he has succumbed to the itch, buying 40 shares of a company whose market value has since gone “stagnant”. He is now merely “waiting for the right moment” to sell.

Likewise Damir, a government worker, says he bought in early 2005 when winnings came easy. “Back then you were bound to make some money, whatever you bought,” he says. But he has since bowed out.

More typically, Zrinka, a Sarajevo housewife says she has “heard something about” opportunities on the stock market, but lacks cash to invest and an understanding of how stock markets work.

“Pump and dump”

One risk is that, while individuals look for opportunities to trade profitably, larger investors can “pump and dump”.

Almir Begic, an investment banking consultant and former director of the Sarajevo Stock Exchange, warns that in a market that is “still all about speculation” the robust presence of short-term investors raises such rises.

“Pump and dump” is a form of financial fraud in which investors publicly hype stock which they have purchased cheaply, artificially inflating its value so they can sell with a gain.

To minimise such practices, markets in the region “must do more to attract investors who will stay for longer than two years,” Begic says.

Indeed, the gullibility of rookie investors appears extreme. Darko Lakic, spokesman for the Banja Luka Stock Exchange, notes that in some cases investors “who only want to hear good news” have purchased shares of companies undergoing insolvency proceedings in advance of liquidation.

Yet Mirica, the Sarajevo Stock Exchange director, says the risk of “pump and dump” is exaggerated. The recent fall of share prices was accompanied by a parallel reduction in turnover, he says, indicating that investors have not been “dumping” aggressively but merely holding their assets amid a fleeting lull in demand.

The way out, both sides of the argument agree, is through better education and more reliable information about company performance.

“In the upcoming period, individual traders will not make much money on the stock exchange unless they first take the trouble to thoroughly analyse the market,” Lakic says.

Dragana Crvenica is a journalist with the daily newspaper Vijesti in Podgorica. Ljudmila Burmistrova is a journalist with TV Nova in Zagreb. Balkan Insight is BIRN’s online publication. This article was published as part of the project: Bosnia and Herzegovina and Neighbours: Training and Reporting on Economic Dialogue, supported by the British embassy in Sarajevo.