Romanian pessimism holds back local capital market

Romanian pessimism holds back local capital market
By Carmen Valache in Nicosia June 21, 2017

Foreign investors are more bullish on Romania than Romanians themselves, Lucian Anghel, president of the Bucharest Stock Exchange (BVB), told bne IntelliNews in an interview in May. 

The effect of Romanians' notorious pessimism on their perception of the economy has been captured over the years in several studies tracking consumer attitudes, such as Nielsen's Consumer Confidence ranking. But the same pessimism that helps Romanians to protect themselves against losses — or unmet expectations and disappointment — may now be hurting their odds of achieving financial prosperity, Anghel believes. 

The Romanian growth story is a good one - the economy has posted above 3% GDP growth in each of the last five years, and is expected to grow at more than two percentage points above the EU average for the next five years. At 8%, its stocks have been posting some of the highest dividend payout yields in the world in recent years. Last month, the BVB registered the highest trading volume in the last decade at €470mn, while its main index, the BET, rose by 23.77% in the first four months of the year, the highest of all the stock exchanges in the EU. 

Investor interest in the Romanian growth story is therefore self-explanatory. The question is: why don't Romanians like it more?

"Unfortunately we do not have trust in ourselves and this kind of mentality needs to change," Anghel believes. That Romanians would put most of their savings — RON55bn (€12bn) at the end of March — in short-term deposits at a time when interest rates on deposits are extremely low is hurting not only their financial prosperity, but also the entire economy. "The entire market capitalisation [of the BVB] is €20bn. Even a slight shift from other assets to equities, either via direct investment in shares or indirectly through pension funds or asset managers investing in listed entities, would make a big difference in the market," Anghel says.

The underlying reason why Romanians do not invest more, Anghel contends, is the lack of financial education in the country. In order to address the problem, the BVB has launched a series of initiatives in Bucharest and other large cities to educate people about investment opportunities in the domestic capital market. "If we improve financial education, Romanians will live better because they will make fewer financial mistakes … and they will understand that it is not wise to put all their eggs into one basket, all their savings in term deposits. Diversifying their investments will improve wealth," Anghel adds. 

The BVB is currently pushing to turn May 15 into National Investment Day, a day when public institutions will organise financial education activities. "We are organising a petition and gathering signatures to turn this initiative into law," he says. "People were at first alarmed that we wanted to have another public holiday. It will continue to be a working day, just one that highlights financial education," he adds.

8% dividend payout

Investing in the local capital market is all the more timely, since the companies listed on the BVB paid an average of 8%, the highest dividend yield in the world, in 2016, according to market research company Berenberg. "Of course some of the funds will flow to the retail side as well, from which we have seen more demand," Anghel says, explaining that the high dividend payout ratio is due to the fact that many state-owned enterprises are listed on the exchange and, by law, they are required to pay dividends to shareholders so that the state can finance its own budget. 

"Many of these companies are monopolists or oligopolists that are very profitable. The state asks for high payout ratios — 50% last year, 90% this year — so this means that the dividend payout ratio will remain one of the highest in the world this year as well," Anghel believes. 

Spurred by an unprecedented number of listings of private companies in the last half-year, activity on the BVB is picking up. And while state-owned companies continue to dominate the capital market, the bourse's management is confident that the private sector will soon take the lead. Anghel volunteers the example of the 15 finalists in BVB's "Made in Romania" competition earlier this year as promising sectors that could see more listings in the near future. 

Tasked with selecting companies with noteworthy accomplishments, business strategies or potential, a committee comprising BVB representatives and independent judges selected primarily IT-based businesses in areas like online marketing (2Performant Network), retail (Ciserom), gaming (Amber Studio), airline management (Blueair Airline Management) and hospitality management (Calirom) among the finalists. The ranking is testimony to the fact that IT will not only drive growth in value-added services, but also, it appears, could hold the answer to the development of capital markets looking ahead. 

Anghel explains that "We selected the companies with potential to use capital markets in different ways to develop their businesses ... We were almost fighting in the jury to reduce the number down to 15. This [competition] is also about helping brokers to discover companies." 

In the shorter term, however, the BVB continues to rely on state-owned mammoths like Hidroelectrica to enlist in order to achieve its goal of being upgraded from frontier to emerging market status, a long-held ambition that will unequivocally put it on the global investment destination map. This means that — in the absence of a critical mass of private sector listings and retail investment — the future of the local capital market is at the mercy of political manoeuvring in Bucharest. 

 

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