Fund yield in January 6.4% – Balkan stock markets growth is back


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Investment inflows have finally started to flow into region of former Yugoslavia again, resulting in high growth of regional Stock Exchange indices. BEF Fund achieved 6.4% return in January.

We are ascertained that Western Balkan stock markets will sustain their strong growth (though no growth is only straightforward upward without possible twists), due to rationale described below.

One of the key driving forces is global perspective. Global stock markets are growing for almost four years already (with minor
corrections) since March 2009, despite all the panic and pessimism in financial markets. Stock markets in BEF Fund investment region that experienced deepest fall since 2007 have however still seen no significant recovery so far. So, while more and more stock indices of developed and emerging markets are close to or even above their 2007 peaks, some stock indices in region of former Yugoslavia are only on 10% of their 2007 values. Divergence and undervaluation of stock shares from Balkan is obvious and huge (Please see attached comparison)! Once these indices rise to just one third of their peaks, this will represent 233% growth; when they reach half of their best past value, that will represent 400% growth; and should they return to their 2007 levels, that would mean the incredible 900% growth. We do not claim that such growth will actually occur very soon, however we want to emphasize the difference between past and present stock prices and the difference in development of stock markets in the region and worldwide. Undoubtedly one might post many reasons for such difference. But they might be similar to majority of investors’ 2007 off the cuff explanations on justifiable stock valuations and on expectations of further growth. Or on March 2009 expectations of »global financial collapse«, while actually the large growth of global stock markets began and is (somewhere also with intermediate corrections) still ongoing.

As mentioned in our previous newsletters, the stock prices on short term are mainly influenced by mass psychology (of investors), price levels on mid-term depend mainly on amount of money circulating in the market and interest rates while fundamental factors play their role mainly on long term. We evaluate BEF Fund investment region to be in transition from psychology influenced phase (general atmosphere just about everywhere is still very negative) to phase influenced by availability of money. Although it is not true that there is no domestic money in the region (it is just »scared« and it is waiting aside in deposits, bonds, gold and other presumably »safe investments«), the main reason for start of new growth in Balkan region is expansive monetary policy of largest central banks globally.

Thanks to record volume of »money printing« (when more money pursue same investments, on average they get more expansive) and extremely low interest rates in US, EU and Japan, (forcing investors to move money from deposits and bonds to stock shares) global stock markets are growing for already four years, as mentioned above. Due to high and lasting growth of large markets some investors are already looking for additional investments by the principle of »which investment opportunities are not yet expensive?« or »what is still inexpensive to invest in?« and the markets in BEF Fund investment region are globally among rare to meet this condition. For this we are certain, that what we currently witness is just the beginning of further growth of Balkan markets. As long as money is »printed« in so far unseen extents and with historically low interest rates, even large global or regional negative surprises would probably cause just temporary corrections and not stock market crashes. Largest central banks are constantly letting us know that they will not withdraw »money overflow« and are even loosening restrictions for investments.

Second reason is that the whole BEF Fund investment region is unnoticeably but for sure closing to EU accession. It looks like investors are still unaware that Croatia will be full member of EU in bit more than four months! According to experience of Romania and Bulgaria accession to EU six years ago, it is very probable that Croatian Stock Exchange will experience significant inflow of foreign portfolio investments that will further increase the value of Croatian stocks. Stock prices on Exchanges in Bucharest and Sofia have marked large growth already in months before entering EU. Even the prices being pretty high at the time of accession to EU they have later grew further on substantially, sometimes to absurd high levels. We see Croatia’s inclusion in EU as a positive signal of European perspective for the whole region (Macedonia is in front of its EU accession negotiations, relations between Serbia and Kosovo are normalizing due to positive EU effect). Most foreign portfolio investments will initially come to Croatia, however we expect that when some of it spills over to countries south of Croatia, its effect on the value of regional stocks will be even larger. Main reason: stock valuation and liquidity on other regional Exchanges are even lower than in Croatia and any larger inflow of money will further increase stock values. It should also not be forgotten that the final strong growth of Balkan financial markets before the financial crisis was contributed mainly by Croatian investors. The growth began mainly through investments from Slovenia; while for the larger part of the extreme growth at the end of 2006 and in beginning of 2007 are due to cash flows from Croatian investors, partially directly from Croatia and partially indirectly via other foreign banks. Once the Croatian market will rise again, local investors will be once more looking for investment opportunities in the neighbourhood, with the viewpoint: »What has not risen yet?«. Countries south of Croatia are also becoming very interesting production location, as work force expense is becoming lower than in China. Taking into consideration additional benefits such as lower transportation costs and countries’ incentives for investments in new local employment opportunities this is very attractive opportunity for European investors.

As mentioned previously, we anticipated a wave of privatization of companies in the region. Small to midsize takeovers are already taking place (Etol, Fructal, Juteks, Ljubljanske Mlekarne and Savatecha) in Slovenia. Acquisition activities are beginning also in other countries of former Yugoslavia (Croatia Osiguranje, Bosnalijek, Alkaloid). We are certain that larger companies will follow soon. Sales are inevitable. Countries in the region need the money and so do the (government owned) banks, some of them full of seized shares. We should also mention that some of these countries are under pressure of International Monetary Fund and World Bank that helped them with loans, but now they call for privatization of countries’ assets. Even though global crisis was present after dot-com bubble burst a decade ago, after the privatization of Lek (part of Sandoz group now) in Slovenia in 2001, large growth on Slovenian Stock Exchange started, followed by the growth on other regional Stock Exchanges.

European Bank for Reconstruction and Development, World Bank and European Investment Bank announced a 30 billion joint action plan to support economic recovery in the region that will also strengthen power of international financial institutions toward regional governments. With accession to EU, first the Croatia and eventually rest of the region will also gain access to EU Structural and Cohesion Funds.

As conclusion to above stated facts we believe that there will be a lot of EU and other foreign investment capital inflows into the region. This will mean not only numerous investments into infrastructure and economy development, but due to EU integration process the regulation will improve and thus also legal safety and framework for additional investments. This will facilitate better operational results of the companies and thus higher stock valuations.
As past experiences show, once the growth starts it might soon be too late to »jump the train« of excellent returns. Due to presently still low liquidity in the region, market will perform with at least 50% –
100 % return before majority of investors will get aware of that and join to investments. The longer decay, the stronger will be the growth. History of stock exchange markets undoubtedly showed with numerous cases that the longer the market persists downwards, the stronger is than the growth, once the turnaround happens (movie on irrationality on capital markets).
Time to invest is now! Once the Balkan will be on front pages of the news it will be too late! By then you will reap superior returns!

Kind regards,
Balkan Emerging Frontiers Fund
Telefon/fax +41 22 518 02 39

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