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Nov 21, 2007 17:17 EEST
SOFIA (Bulgaria), November 21 (SeeNews) – Many shares trading on the Bulgarian Stock Exchange (BSE) are overvalued at the moment as demand exceeds supply by far but no meltdown is expected despite an ongoing correction, asset managers say.
The stock exchange has attracted a significant amount of cash from international and domestic investors alike in the past year, partly because of the country’s accession to the European Union in January, which has made foreign investors much more comfortable with buying Bulgarian stocks.
Robust demand lifted the blue-chip SOFIX index to 1,934.45 points at the end of October, up 59% since the end of 2006, while the broad BG 40 index had tripled to 606.82 points to that date.
At the beginning of November, however, a correction started. It was partly due, brokers say, to some industry officials raising concerns that a market bubble was in the making.
The Bulgarian Association of Licensed Investment Intermediaries said earlier this month that many Bulgarian stocks were overvalued. It also said that the share prices of some low-liquid companies were allegedly supported at high levels in a manipulative way with the aim to boost portfolio performance.
The association quoted price-to-earnings ratios for the SOFIX and the BG 40 index at end-October being 30 and above 185, respectively.
“There are overvalued companies, for sure, and their number is not small (…) It is just that supply is much lower than demand,” Petar Vasilev, portfolio manager with Alfa Asset Management, told SeeNews.
“Having in mind the average continuous annualised return of SOFIX ranging between 28% (trailing seven years) to 42% (trailing five years), we were heading way above the mean [before the correction started],” Georgi Bylgarski, portfolio manager at Beta Corp investment intermediary, told SeeNews.
The recent rise in most share prices has fueled unrealistic expectations about the companies’ future performance, portfolio manager at Elana Trading Krasimir Atanasov told SeeNews.
“A number of them are priced to perfection, which is, as we know, a fragile and transitional state,” Atanasov said.
“There are moments when a lot of investors go by the buy-expensive-and-sell-even-more-expensive principle. These moments can last longer than it is reasonable to expect them to and they usually do so,” Atanasov added.
He said the surge in share prices has been stimulated mainly by fast growth of mutual funds’ assets and an inflow of cash from local investors.
Vasilev said it was hard to say whether small players or institutional investors had contributed more to inflating share prices and the problem rather lies in the miniscule free-float of Bulgarian companies that allows individual buyers to easily manipulate their share prices. The free float of companies included in the blue-chip SOFIX index of the Sofia bourse vary from 0.17% to 0.51%.
Bylgarski said speculators seeking fast returns without paying much attention to the fundamentals had also contributed to the fast rise in share prices in the past year.
Vasilev said overvaluation of stocks was not rare on other stock exchanges in the region either, as significant volumes of foreign-based cash were targeting emerging economies, thus helping fast growth of stock prices.
The stock market in neighbouring Romania, which joined the EU together with Bulgaria, has also been enjoying strong demand in the past year.
“The large amount of money, which had been poured in had made everybody think this will last for a long time and they could cash in profit at any time and now it is unclear whether this will be possible for everyone,” Vasilev added.
“It is dangerous because a moment comes when investors open their eyes and realise they have bought something which does not cost as much and then run away in panic,” Vasilev said.
What currently prevents the market from an abrupt fall is the large amount of free cash targeting the Bulgarian stock market. The number of alternative investment opportunities is limited, he added, giving as an example the country's real estate sector, which has been absorbing huge amounts of money in the past several years and has now slowed down its growth.
“Things could turn round if this money decides the stock exchange is no longer the place to be invested,” Vasilev said.
He added foreign investors were likely to act most reasonably in the situation of a falling market as they had carried out thorough research prior to entering the market and a correction does not come as a surprise to them as it does to certain inexperienced individual investors on the Bulgarian market. An abrupt and sharp fall could keep such inexperienced investors away from the stock market for quite some time.
“Most of the mutual funds and institutional investors enter our market after a strong fundamental analysis. Their positions, if long-term, would not be susceptible to market fluctuations. On the other side, any high-risk, short-term game could most probably be punished by the current high volatility,” Bylgarski agreed.
Corrections in themselves are healthy for the market because they are cyclic developments but a strong bull run combined with a sharp increase in share prices and weak fundamentals results in a prolonged reign of bears, Atanasov said.
Trading in the coming year will be influenced by planned initial public offerings (IPOs), which will take some heat off the stock market, said Atanasov. He added the introduction of flat income tax of 10% from the beginning of 2008 in the place of current progressive taxation of personal incomes would increase the disposable income of Bulgarians and increase the inflow of free cash to the bourse.
Several IPOs are expected to take place by the end of the year and more are seen coming in 2008.
“I expect a certain cooling down of emotions regarding well-known companies, which would lead to a very small rise in indices by the end of 2008. I rather expect that the main player next year will be the market's volatility,” Atanasov said.
“At the moment I think it is hard to talk of a serious [downward] correction. A movement in the opposite direction [down] by 10% or even 20% by the end of the year is possible, which would be quite normal, having in mind the fast rise seen throughout the year,” Vasilev said.
He added average yields could reach 70% to 80% this year with the challenge being keeping profitability at the levels that have been reached so far. Returns are likely to drop to around 30% in 2008, he said.
“I think this is the last year to see yields close to 100%,“ Vasilev said.
Bylgarski said the 2007 and 2008 year-on-year yields were likely to fluctuate around the mean of the last five years.
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