ANALYSIS – Amid Growing Confidence Crisis on Global Markets, 30% End-year Loss May Please Investors in Serbia

Analysts agree that the absence of foreign investors, scared away by the global crisis, drives market liquidity lower with the blue-chip index BELEX15 recording a 56% plunge since the beginning of the year.

“It is illusory to believe that this minus of over 50% will be erased by the end of the year,” Nenad Gujanicic, head broker at the Sinteza brokerage, told SeeNews. “Simply it will be the first year for the Belgrade market in the minus area in the transition period. Considering the current state of affairs, investors would be happy if it is minus 30%.”

“It is difficult to make projections of what will happen further but I think it will remain at the current levels,” said Danko Knezevic, a broker with Delta brokerage. “I think it will be good if we don’t sink further than this 50% drop until the end of the year.”

The BELEX15 is now just around 10% higher than it was in 2005, when the bourse launched it. The Serbian economy has grown over 20% over these three years.

“So we have this paradox: the GDP is growing faster than the index, even though a lot of the listed companies have doubled or tripled their revenue and profits,” Gujancic said.

The global financial crisis, which evolved from the credit crunch, has an indirect influence on Serbian stocks because local companies have no exposure to bad mortgage debt. Most Serbian banks doubled their profit year on year in the first half of 2008.

“But the Belgrade bourse depends on foreign investors and when they have problems, demand from them falls, causing share prices to drop,” Gujanicic said.

The largest foreign investors on the Belgrade Stock Exchange (BELEX) come from Slovenia, Austria and Croatia, where the markets also suffered from the global financial crisis.

“So, on one hand they close their positions and, on the other, they do not inject fresh money and both of these result in price drops. The problem is the liquidity. It is the principle of communicating vessels,” Knezevic said.
 
Mladen Dodig, head of equity research with Erstebank’s Synergy Capital, expects aftershocks to follow on global markets, which will also disturb the Belgrade bourse.

“Even though it is a small market, it suffers because foreign investors are not interested in it as they can buy a similar valuation on other markets, which are more developed,” Dodig said. “If someone sees price/earnings ratio of 10, let's say in Germany, they will most likely buy a share there rather than one with a price/earnings of eight in Serbia.”

EMERGING MARKET BENEFITS

A legislation regulating the fund industry business in Serbia took effect in December 2006 and the first fund started operations in May 2007. In this sector, Serbia trails far behind other former Yugoslav republics like Slovenia and Croatia, and lags behind its neighbours Romania and Bulgaria.

“Compared to the region, Serbia has this fortune, or misfortune - I’m not sure, that it hasn’t succeeded to develop the investment fund industry to a very big extent,” Knezevic said, adding some 50 million euro have been invested so far in the Serbian funds, while Croatia’s fund industry attracted some four or five billion euro during last spring’s boom. “So, probably repercussions there are much stronger.”

Thirteen mutual funds operate on the Serbian market at present compared to some 120 open-end investment funds active in Croatia, a country of 4.4 million people. Serbia's population is 7.4 million.

“It is now good we didn’t have a thousand of investment funds or an expansion of credits for equity purchases,” he added.