Despite the upstreak witnessed for a fourth successive day and a four per cent month-on-month turnover increase in April, the Bulgarian Stock Exchange (BSE) has been experiencing the gloom of recession.
The bourse has been on a one-year low, the main indices have lost 30 per cent of their value in the same period of time, two thirds of shares are traded little or not at all, market capitalisation has run scant, and there are few signs for recovery in the short run, brokers agreed.
The main reasons behind the bourse nosedive are internal and external factors. Enduring pessimism on international financial markets in the past few months affected the local market as well. Unruly inflation hurt corporate results and had a negative impact on companies’ performance on the bourse. Corruption rows in EU funds administration, which have irked the EU and created problems in the flow of EU money to Bulgaria whatsoever, are also slated to have a massive, though hopefully a short-lived, impact on bourse trading.
The global financial crisis resulted in growing risk sensitivity. The result was that foreign institutional investors narrowed their positions in emerging – and riskier – exchanges as Bulgaria’s, analysts told The Sofia Echo. This pullout rippled down to local retail investors and the end result was fewer market players and shrivelled liquidity on the BSE, said Tsvetoslav Tsachev, an analyst at Elana brokerage.
In addition, a group of retail players on the market, who in a euphoric upswing last year struck lavish repo-deals (taking short-term loans to buy equity), racked up huge losses afterwards and froze their positions to stem losses, he said. Hence, a “wait-and-see” mood on the bourse, which has produced turnovers a far cry from what they were.
Another reason for the lull is the disappointing consolidated reports of public companies in the first quarter of the year. An analysis of public companies’ performance saw almost 60 per cent of all listed industrial enterprises reporting declines in net profit even though revenues took the reverse path. The average increase in revenues of Bulgaria’s 100 most liquid companies totalled 27.68 per cent. Tsachev said that it was mainly inflation that ate into companies’ bottomline. Double-digit inflation led to a spike in the prices of input materials and utility bills; hence the expenditure column grew at a faster pace than revenues, he said.
And the overall result is: since the turn of the year the Bulgarian bourse shed 21 per cent of its market capitalisation to 22.9 billion leva. This figure equals 41 per cent of Bulgaria’s gross domestic product (GDP), whereas at the end of 2007, capitalisation stood at 55 per cent.
Sofix, the index that includes Bulgaria’s 19-largest and most liquid shares, shed 40 per cent of its value over the past 12 months. Almost paramount was the loss of the broader BG40 index.
In morning trade on May 13, Sofix added three per cent to 1218.72 points, the broader BG40 was up 4.04 per cent to 336.7 points. The index facing tracking trade in real estate investment trusts BG REIT was up 0.65 per cent to 94.64 points and BG TR30 rose 2.43 per cent to 819.95 points.
Among the companies that have been worst hit by the downturn are infrastructure companies and those operating in more cyclical sectors. The shares of road construction and maintenance companies such as Holding Putishta, Moststroy and Trace Group, among the most liquid securities on the bourse, lost between 44 and 60 per cent of their equity. Pharmaceutical company Sopharma and the chemical company Orgachim are also among the big-time losers.
According to Tsachev, no tangible positive factors possess the potential to trigger a tangible uptrend before the end of the year. Inflation, with forthcoming and substantial price hikes for all utilities, is hardly likely to be harnessed and, naturally, it will still hurt the overall performance of public companies. What is more, the international markets are still too volatile to actuate a positive turnaround on the local bourse. Therefore, slack volumes and feeble liquidity are to be on for quite some time, Tsachev said.
Svetozar Abrashev, a managing director at First Financial Brokerage House (FFBH), however, sounded upbeat believing that positive sentiment is back on international capital markets, of which the BSE is part, and would thus lead to recovery on the local market. Consolidated reports of public companies during the first quarter of 2008 would also govern trade during the next few months.
Another factor might also have an emphatic effect on the bourse. If the EU resorts to harsh punitive measures over corruption with administration of EU funds, this could have a very damaging and immediate effect on the local bourse, according to analysts.
“The downturn on the market will be strong, sharp and omnipresent,” Tsanko Arabadjiev, a portfolio manager at OBB Asset Management, told Dnevnik daily.
Worst hit would again be infrastructure entities, yet the entire spectrum of shares would also be harmed by general loss of optimism, according to the analyst.
Nonetheless, brokers agreed that the decrease would be short-lived as the freeze was not an ultimate halt of EU funding after all.
Tsachev, though, is more optimistic about medium-term prospects, paying due tribute to the efforts of the Central Depository and the BSE to invigorate trade through partnership agreements with regional peers. It emerged last week that the central depositories of Bulgaria and Romania were due to strike an agreement that could enable joint financial transactions, initial and secondary public offerings on more than one bourse.
In addition, a new trading system, developed by Deutsche Boerse and due to be launched on June 16, is also hoped to boost trade turnover and liquidity on the market. Once operational, XETRA would make Bulgarian securities available to 400 banks and houses and 5000 brokers in 18 European countries, Victor Papazov, chair of the BSE board of directors, said during the news conference on the local market.
Trade would also be given a boost through creating conditions predisposing for margin transactions and short sales, according to FFBH’s Abrashev.
A bourse uptick could also ensue if the macro-economic fundamentals and political stability persist, he said.
“The fact that Bulgaria is already a member of the EU is likely to trigger the entry of funds facing EU-registered public companies and would have a positive effect on BSE liquidity,” Abrashev said.
Despite the rosy future ahead, the bourse has yet to surmount the negative developments of the past few months.
