25 January 2008

Balkan exchanges defy categorisation

Dramatic fluctuations in value on the world’s largest stock exchanges are partly mirrored in southeast Europe, but the region’s capital markets have yet to ‘couple’ with the defining trends in global finance.

By Eric Jansson
Published by BIRN's Balkan Insight
, 24 January 2008

The stock exchanges of southeast Europe, which have so long dreamed of paralleling the trends of global capital markets, this week briefly saw this dream come true.

It has been a disappointing experience.

Share values plummeted early in the week. Bucharest’s BET nosedived 10.8 percent, while the Total Market Index in Ljubljana fell 10.1 percent. The BELEX 15 in Belgrade and CROBEX in Zagreb each plunged by around 9 percent, and other indices fell, too.

It was not the kind of parallel the region’s investors had hoped for, but the losses recorded on Monday and Tuesday did resemble those seen on leading European exchanges. Early this week in London, the FTSE 100 dropped 9.5 percent before rallying, and the DAX in Frankfurt fell by 12.2 percent.

Some local market analysts in southeast Europe described the parallel plunges as an indicator that Balkan exchanges were, at long last, in step with global trends.

At a certain level, this is unarguable. As Balkan countries have liberalised their economies during recent years, both within the European Union and outside it, they have increasingly exposed themselves to the pressures of international finance for good and ill.

Some markets within the region – especially Slovenia, Romania and Bulgaria, as new EU member states – are more exposed than others.

Yet a broad analysis of market data from across southeast Europe over the past 12 months indicates two broad points.

First, most of the exchanges of southeast Europe cannot easily be lumped into any other category of European exchanges. Across the region of patchwork republics large and small between Austria and the Black Sea, stock market performance bears little resemblance to what is experienced in the two other major groups of exchanges in Europe – the established exchanges of western Europe, where indexed results frequently look like amplified versions of results in New York, and the larger emerging market stock exchanges of central Europe and Russia, where fluctuations are even greater yet often diverge more notably from US-driven trends.

Second, an extreme diversity of exposure to global investment trends continues to characterise the region’s exchanges, with results varying greatly from country to country and exchange to exchange.

To examine the first point, we need look no further than the performance of exchanges in the region during this climactic week. For investors, the early week through Wednesday was characterised around the world initially by the high drama of steep share-price falls. The falls originated outside the US yet were catalysed apparently by perceived risks of US recession. Soon thereafter the market changed colour with the US Federal Reserve’s “once-in-a-generation” interest rate cut of 0.75 percent, a step seen as good news for stock investors but a surprise to many, yielding mixed results.

Faced with a selling urge on Monday and Tuesday as powerful as global markets had witnessed since September 11, 2001, share prices everywhere dropped, and southeast European share prices were no exception.

However, the average fall in southeast Europe was significantly lower than those seen in western European markets. It was lower still than falls seen on Russian and central European exchanges.

However, most exchanges in this region were also slower to recover. While leading US indices as well as those in some west European capitals, Moscow and Warsaw rallied after their initial falls, actually posting gains overall on the week no later than late Wednesday, most exchanges in southeast Europe continued to fall or merely flatten out. Exceptions were the exchanges in Ljubljana, Skopje and Banja Luka, the former being a new EU exchange and the latter being both small and idiosyncratic.

Look much further back, over the past 12 months, and other aspects of divergence show up.


One noteworthy milestone is peak-value for 2007. While indices in Serbia, Montenegro and Bosnia-Herzegovina all peaked early then turned south in April and May, the Bucharest exchange’s BET index kept growing until July, as did the prominent WIG index in Warsaw, matching central Europe’s leading index, Frankfurt’s DAX.

By contrast, indices in Sofia, Ljubljana and Macedonia did not peak until August.

Only Zagreb peaked in October, the same month as the key American indices, the Dow Jones Industrial Average and the S&P 500, along with London’s FTSE 100 peaked. While it is clearly no coincidence that the US and British indices peaked together, there is no evidence that Zagreb’s joining them was anything but coincidental.

This scattered trend calendar indicates that no global trend defined Balkan trading patterns. On the contrary, the factor that continues to define the exchanges of southeast Europe, much more than global capital markets do, is local market peculiarity: balkanisation.

This factor, magnified in most markets by low market capitalisation, is also why the region’s exchanges look back very differently upon the past 12 months.

Bucharest, Banja Luka and Sarajevo paralleled a broad global trend in that their leading indices lost value over the past 12 months, but any suggestion that this is more than coincidental is undermined by the fact that, unlike the central European and Russian exchanges, which also fell during the year, six southeast European exchanges posted spectacular growth – notwithstanding sharp recent falls.

Surprisingly, the region’s 12-month growth club is led by the tiny Macedonian Stock Exchange, whose MBI-10 index has grown by 74.5 percent. But the group of top performers also includes exchanges in Podgorica, Ljubljana and Zagreb, whose range of growth stretches from 45.8 percent to 26.4 percent.

Investors still need to factor in the extreme volatility expected of small emerging markets. For example, the Macedonian exchange, despite its remarkable 12-month growth, has also fallen steeply from its 2007 peak, with the MBI-10 losing 30 percent of its value since August. Other steep fallers include the Banja Luka exchange, whose BIRS index has suffered a brutal 53 percent hit, poorly-performing Sarajevo and the dynamic Montenegro Stock Exchange.

No fewer than seven leading indices, each reflecting performance at a different exchange across southeast Europe, have lost 30 percent of their value since peaking in 2007.

To serious investors active in southeast Europe, it is little consolation that Warsaw’s WIG did, too.

That it did is a reminder that full membership in the EU and exposure to large-scale international finance, so coveted by investors in southeast Europe, are not forms of shelter against brutal market forces. They are merely invitations to compete.

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