BVB versus Foreign Stock Exchanges in Terms of Market Multiples
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MARIUS PANDELE
Head of Research
TRADEVILLE S.A.
In previous years, stocks listed on the Bucharest Stock Exchange were well-known for being traded at rather high multiples compared to stocks listed on more developed markets. Nevertheless, the economic crunch has overturned this image, the overall picture undergoing drastic changes after the free fall witnessed in 2008 and since the beginning of 2009.
Between 2005 and 2007, the average of the P/E ratio for stocks incorporated in the market's benchmark index BET hovered around 20, after having gone up from below 15 in previous years. At the same time, in well developed markets, stocks were traded at far lower prices compared to earnings, in comparison to Romania.
However, after the steep plunges suffered at the end of last year, the average of the P/E ratio for the stocks included in the BET index had decreased to a mere 5.74, while the overall average was slightly lower, below 5.5. At that time, Romania had the lowest average of the P/E ratio after frequently having marked values higher than other European markets throughout 2005-2007.
The rebound noticed since March 2009 in stock markets combined with crippling financials posted by local companies have led to a slight uptick in the multiples of Romanian companies listed on the stock market.
Apparently the state of affairs generated by the international economic crisis is a rather unusual one, with companies from emergent countries being traded at lower multiples than those in mature markets, a complete U-turn. The most plausible reason for this situation is the shift in investors' chief interest from reaping substantial profit to making safe investments. During time periods characterized by a lower risk aversion like the one before the burst of the sub-prime crisis in US in 2007, investors were looking for companies with the highest growth potential and those companies always came from emergent markets. After that moment, the risk aversion of investors from all financial markets rose significantly, gradually focusing their attention on blue chips less exposed to bankruptcy risk from a theoretical point of view.
The adjoined tables display the current situation on some of the most important stock markets worldwide and from Central and Eastern Europe regarding the multiples at which these are traded. More exactly, the stocks included in the composition of the most representative indices in those markets, such as: Dow Jones Industrial Average for the United States, FTSE100 for Great Britain, DAX for Germany, Nikkei225 for Japan, CAC40 for France, ATX for Austria, WIG20 for Poland, PX50 for the Czech Republic, BUX for Hungary and, naturally, BET for Romania. One of the obstacles encountered when trying to compare the BET index with other benchmark indices on foreign stock exchanges is the fact that BET has only 10 issuers in its composition, unlike the other indices that generally comprise of over 20 companies. Therefore, an average of ratios corresponding to companies that compose the benchmark index of the Bucharest Stock Exchange is usually less relevant than in the case of other stock exchanges because of the small number of companies, thus out of the ordinary values easily distorting the final result. Obviously, when calculating the averages for the stock exchanges studied in this research we have eliminated extreme values of the ratios in order to obtain truly relevant averages.
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