ANALYSIS - Global Panic Helps To Cool Down Adolescent SEE Equity Markets

"The recent slide was healthy as some share prices had gone too high," Matej Modrovcic, an asset manager with Croatian Hypo Alpe-Adria-Bank, told SeeNews. He believes that developments on global markets will certainly dictate what happens on the markets in the region but political stability in Serbia and war-divided Bosnia remain a key factor for them. "It’s too early to say if the crisis is over; ahead of both world markets and southeastern Europe is period of volatility when answers to some questions will be sought and in the short-term we will see ups and downs as a consequence of the uncertainty, until it fades away," Modrovcic added.

Concerns over the U.S. economy and a possible global economic slowdown led to huge losses on markets in Asia, Europe and the  U.S. earlier this week. Later, after a key U.S. interest rate cut and plans for an economic stimulus package, world markets bounced back. Reflecting world developments, the bourses in the Balkans faced one of their biggest ever panics earlier this week but recovered on Thursday and Friday, as evidence their correlation with global markets is increasing.

"Our markets shadow global market developments," said Danijel Miletic, a fund manager with Croatian fund manager Fima Global Invest, that invests across the region. 

Since the beginning of the year, benchmarks in Romania and Bulgaria lost 22 to 25%, while in Croatia, Serbia and Slovenia fell  some 10%. That translated into losses of several billions of euro and falls of bourses’ market capitalisation ranging from some 7.0% in Zagreb and Ljubljana to some 15% in Sofia and even 20% in Bucharest.

These falls scared many retail investors in the former communist countries in southeastern Europe, who, having achieved huge returns, sometimes of above 50% annually, in the past few years, for the first time suffered substantial losses.

"This shocked us, nobody had been expecting such a thing," Croat Neven Zubak, 34, a software developer and retail investor on the Zagreb bourse, said. He -- like many other small investors in the region -- had been focused on regional factors like Croatia’s new cabinet and rising inflation, presidential elections in Serbia and developments concerning attempts by U.N.-run Serbian province of Kosovo to become independent, rather than the situation on foreign markets far away. 

Zubak, who has been investing on the Zagreb bourse for three years, lost some 30,000 kuna ($6,000/4,100 euro) due to the fall in prices of shares in his portfolio in the past few days. He said he did not sell or buy anything and will continue investing in shares but only when the market calms down.

Professionals said some domestic investors should be aware that bourses bring not only gains but also losses: "The consolidation of the market is part of its lifetime and it’s not good when the market only rises, either," Antun Buric, fund manager with Croatian PBZ Invest said.

Some bourses, like Zagreb, passed through the storm of selling orders without technical problems, while others, like Sofia, suffered a collapse of its trading system, Client Order-Book Online System (COBOS) on Tuesday due to massive selling.     

In Zagreb, the turnovers almost doubled this week compared to levels at the beginning of the year. "What makes us happy in all this situation is that, for our conditions, the market is very liquid," Zeljko Kardum, spokesman of the Zagreb bourse told SeeNews.

"The turnover was relatively huge, as some investors consider the recent falls as an opportunity to buy, while others wanted to exit regardless of the prices they were able to get. Moreover, buyers were rather reserved," Dario Bjelkanovic, trader with Croatia's largest brokerage Intercapital, said.

According to him, the Croatian market has been "OK" so far in this story, when compared to other bourses in central and eastern Europe where falls have been stronger. "However, that fall is not meaningless. It’s too early to say how the Croatian market has dealt it with the recent drop as it is not finished yet. I would rather name it a drop, not panic," Bjelkanovic said. The Zagreb bourse is the biggest by marekt capitalisation in the region. 

This is not the first big sell-off in the region caused by global market developments as Croatia and Slovenia faced similar losses  in the past few years. But in other countries, like Bulgaria, this relationship with global markets is relatively new:  "Correlation of Bulgaria’s stock market with global ones had become more evident three or four months ago, even though the country joined the European Union in January 2007," said Petko Valkov, managing director of Sofia-based Benchmark Asset Management.

So far, only Slovenia, Bulgaria and Romania are EU members, the others are at different stages of building closer ties with the bloc.

Within the former Yugoslav countries, the global market plunge impacted Slovenia to the greatest extent and a little less  Croatia where they coincided with massive withdrawal of country’s pension funds from mutual funds following regulatory changes that enlarged the pension funds’ investment opportunities, Modrovcic said.

A postponment of the privatisation of Telekom Slovenija intensified the drop but the main driver was foreign markets, Andraz Vrh, asset manager with Slovenian brokerage Ilirika said.  

The external crisis failed to hit to such an extent Serbia, Bosnia and Macedonia as Serbia and Bosnia have  internal problems due to political uncertainty. Serbia will face on February 3 a second round of presidential elections between a nationalist, Tomislav Nikolic, and pro-Western incumbent Boris Tadic.

The expected earnings growth of an average of 30% in Croatia and 40% in Serbia for 2007 confirms that fundamentally these markets definitely have potential, Hypo’s Modrovcic added. "If the situation in Serbia stabilises, the region has a very good outlook," he said.

PRICES CALM DOWN

After strong gains in the previous few years many share prices had reached too high levels compared to international peers, due to bullish investors and unrealistic expectations, the analysts said.   

"Absolutely, after the drop some share prices have become more attractive, while others remain not so cheap. But it’s not about if single shares are attractive or not; the problem right now is stock as a class of assets," said Bjelkanovic who recommended to the numerous inexperienced and optimistic investors on these markets to wait until the markets calm down and to invest rather through the professionals managing mutual funds rather then directly on the bourse.   

"It’s not realistic to expect a wave of professional investors tapping these markets only because the share prices have fallen as in a falling market nobody wants to fall from large positions, Bjelkanovic said.

"We can expect higher investor demand [due to lower prices of shares] but this will happen only if international markets calm down," one Romainain broker said. The biggest affects of the crisis were the prices of the country's five geographically-defined investment funds, down more than 25% and the banking sector. 

(1 euro=7.2708 Croatian kuna) 

(Additional reporting by SeeNews reporters Andreana Todorova, Iskra Pavlova, Hristina Stoyanova and Tzvetelina Gavrilova)