Nicholas Watson in Prague -

The 16 straight days of declines show that Serbia's stock market is not for the faint-hearted, nevertheless it's still had a very good year overall.

The blue-chip index on the Belgrade Stock Exchange (BELEX) lost another 0.43% to 2,513 points on Wednesday, October 31, marking 16 straight days of decline and bringing the BELEX15 down some 33% from its historic high hit in May.

The problems are inevitably put down to the escalating problem over the final status of the Kosovo province, which threatens to come to a head on December 10 when the current round of talks under the aegis of the EU, US and Russia come to an end. Without a definitive agreement by then, the ethnic Albanian government has threatened to declare unilateral independence from Serbia, something which Belgrade, backed by Russia, fiercely objects to. Serbia has offered a level of autonomy, but to date there appears little sign of compromise.

The financial problems rippling out from the US sub-prime mortgage mess have also hurt Serbia's stock market. Though the concerns about the US credit markets are not directly related to the region, Erste bank says in Serbia's case it clear that major players had concerns in other markets, and their lack of activity left the Serbian market drifting sideways. Given the still shallow nature of Serbia's stock markets, this situation inevitably leaves it vulnerable to sharp downward moves.

That highlights the need for the coalition government, currently preoccupied with the political issue of Kosovo as well as increased tensions in neighbouring Bosnia and its usual internal bickering, to attract more investors. Though progress is slow, there have nonetheless been positive developments in this regard, which did much to propel the market forward, especially in the first half of the year.

Insurers and pensioners

Seven voluntary pension funds and four open investment funds have been launched this year, most of them in the past few months, and there are two other investment funds waiting approval from the securities watchdog. "It's early days - the market must settle and must find investors," says one foreign investment banker based in Belgrade. "But it's a good thing these funds have opened."

The total net asset value of open investment funds was around €58m as of September, while the net asset value for pension funds was around €31m. Some of these funds have enjoyed double-digit percentage performance, which will provide further impetus to several other investment organizations planning to launch new funds, says Erste Bank.

The investment banker also stresses the need for the government to press on with developing the country's insurance industry, which together with the pension funds will provide more liquidity to the market. The industry should get a boost when the second-largest insurer, DDOR Novi Sad, is privatised in December. According to reports, interested bidders include AXA, Allianz, Generali, KBC Group, Groupama, VHV Group, Fondiaria SAI, Triglav, Wiener Stadische, La Baloise, Czech Pojistovna and Ethniki.

As well as more investors, there are also more stocks to invest in. Following the financial watchdog's directive that all joint stock companies must be listed on the organized market, the number of listed companies rose to 1,700 from 1,100 at the end of 2006. It is also reckoned that a few hundred more still remain to be listed. Erste Bank says the estimated total market capitalization of listed equities in September was €17.7bn, more than 110% higher compared with end-2006. In addition, there have been several large capital increases carried out this year, including the €100m capital increase by AIK Banka in June.

To attract more foreign interest, Wiener Boerse launched in March the Serbian Traded Index (SRX) - a capitalization-weighted price index, made up of the most-traded stocks on the BSE. The index is calculated in Serbian dinar, euros and dollars. It is disseminated in real time by Wiener Boerse and designed as a tradable index to be used as underlying for derivatives.

Even so, Erste notes that foreign investors' share in equity turnover fell from an average of 51% in 2006 to 43% in 2007. One of the reasons for this is that Serbian shares have very "demanding" valuations, especially the listed banks, whose price/book values are in the 4-8 range, a result of huge interest by foreign banks in one of the last major under-developed banking sectors in the region. The market-weighted price/earnings ratio for BELEX15 components was 48.7 when the index hit its all-time high in May.

Thus, high valuations and the continued political risk, as well as the continuing global instability, promise to restrain foreign interest in the market. But with more domestic investors providing liquidity to the market and a possible non-violent resolution to the Kosovo problem, analysts say the Serbian stock market could develop in the same manner as those of the former Yugoslavia such as Croatia and Slovenia: a slow burn for a time, which then reaches a tipping point and the market takes off quite quickly.

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