Romanian Capital Market 2H 07 Wrap-up

Martie 2008

IULIANA SIMONA MOCANU - Head of Research Department RAIFFEISEN CAPITAL & INVESTMENT

Clouds still darkening the horizon

Bucharest Stock Exchange (BSE) had an uneven evolution during 2H 2007, with the high of the year reached in July, followed by a severe correction and then a rebound, the indices closing slightly above 1H 2007 levels. Over the second half of the year, BET index and BET-C composite gained 1.7% and 1.6% in nominal RON. The depreciation of the local currency in 2H 2007 generated negative EUR-based returns of around 9%. The EUR-based market capitalization went down by 12% to RON 86.0 bn (EUR 24.6 bn) mostly on the back of RON depreciation against the EUR.

While in the first semester market evolution was influenced by improving companies’ fundamentals and investors’ bullish sentiment sustained by fresh capital inflows, the second half saw a correction determined by the downturn of the international markets and the weakening of the macro indicators. Still, near the end of the year BET recovered partially the losses incurred in the previous months, the 2007 performance being comparable with 2006.

For the first half of 2008, we expect strong volatility, at least over the first quarter, driven by investors’ nervousness on US recession fears and the global credit crunch and the lack of positive domestic macroeconomic news. We might see the market reviving in the second quarter, as we expect the international crisis to recede and the Romanian listed companies to report good results for FY 2007 and 1Q 2008.

Our watch list includes SIF1 and SIF2, Rompetrol (RRC), Petrom (SNP), Transgaz and BRD-GSG. From the small caps segment, we recommend also Prospectiuni (PRSN), Rompetrol Well Services (PTR), Imotrust (ARCV), Ceramica (CERE) and Albalact (ALBZ).

The IPO of the national transporter of natural gas, Transgaz, ended successfully on December 7, 2007 and allocation rights, a premier on the Romanian market, started trading on December 19, 2007. In 2008, we expect a flourishing year in terms of IPOs as more private and state-owned companies announced their intentions to go public.

 

Market performance 2H 2007

The first half of the year saw buoyant appreciations of the share prices, due to positive expectations following Romania’s accession to the EU on January 1^st, the appreciation of the local currency and the capital inflows from funds focusing mostly on the EU markets. Still, the uncertainties regarding SIFs ownership limit and political tensions between the two ruling parties (Democrats and Liberals) that culminated with president impeachment at end of April induced short-term volatility in the capital market, especially in the first quarter. These brought the lows of the year on March 5^th. After this date, the market started to surge, pushed by increased investors’ interest and positive results reported by the companies for 2006 and 1Q 2007. Even the change of the outlook for Romania from positive to stable by Standard & Poor’s ratings agency on April 5^th, determined by the expected negative effects on economic reforms following the government reshuffle did not daunt the investors’ keenness. Both BET and BET-FI hit the high of the year on July 24, BET rising 34% and BET-FI 50% against the closing price of 2006.

The second half of the year brought a severe correction, mainly determined by the prolonged international credit crunch but also the negative macro-economic news regarding the enlargement of the current account deficit, the hike in inflation and the sudden RON depreciation. Starting with July 2007, the negative signals received both from the international markets but also the worsening of the domestic macro-economic indicators brought a prolonged depreciation on the market, which lasted between the end of July through November. Beginning of November, the rating agency Standard & Poor’s revised its outlook on Romania from stable to negative.

At the end of November, BET had lost 17.7% against the year high, remaining still with an appreciation of 10% ytd, while BET-FI dropped 25.4% against the July 24 closing, at an upside of 12.6% against the closing price of the last trading day of 2006. Some of the losses were recovered over the last month of 2007, the indices slightly exceeding, at the end of year, the levels at the end of the first semester.

The scarcity of IPOs on the domestic market has brought smaller companies (even by local standards) to investors’ attention. Over 1H 2007, the entrance of several large players drove prices for some of the stocks to bold valuations. The correction from the second half of the year impacted, but not dramatically, the newly born stars and Rasdaq composite fell 8.4% during the period. The market capitalization of Rasdaq has reached EUR 7 bn at the end of 2007, while the average daily liquidity was spectacularly enhanced from EUR 1 mn in 2006 to EUR 5.2 mn in 2007.

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