Slovenia has quietly delivered some of the best equity market returns in the world over the past decade, with Romania not far behind, according to analysis by InterCapital. The Zagreb-based investment services firm finds returns from the two countries have outpaced developed peers and are comparable with the US’ Nasdaq, but at a fraction of the valuation cost.

The main blue-chip indices of the two Balkan markets – Slovenia’s SBITOP and Romania’s BET-TR – have surged +498% and +385% respectively over the past 10 years, with double-digit gains continuing this year. That compares with a +436% gain for the Nasdaq 100 and +243% for the S&P 500 over the same period, according to InterCapital analysis.

“Out of 80 countries, Slovenia and Romania are right at the top,” said Divo Pulitika, fund manager at InterCapital, in an interview with bne IntelliNews. According to Pulitika, their performance is underpinned by both earnings growth and, in Romania’s case, multiple expansion. The effect of dividends has also been key.

SBITOP stars

Slovenia’s SBITOP is highly concentrated. Three companies – pharmaceuticals giant Krka, Slovenia’s largest bank NLB and regional energy and fuel distributor Petrol – account for around 70% of the index. Each has expanded beyond the small domestic market into ex-Yugoslav neighbours, driving earnings growth.

“All of these three — and the rest of the SBITOP — had an amazing earnings performance over the last 10 years,” Pulitika said. 

Their growth, he said, partly reflects the expansion of the Slovenian economy, which overshot the EU average. But it is also a regional — and in Krka's case a global — story. 

“Krka is almost a global company, but Petrol, NLB and Slovenia’s two big insurers are present in the rest of the region, which is actually where they managed to get a lot of growth,” Pulitika told bne IntelliNews. 

“Unfortunately the reason why the region grew so much is there was a very low base to start with 10 years ago, given the breakup of Yugoslavia and the wars. There was a long period of crisis, then we saw economic improvement.” 

He also cites good governance and professional management of Slovenia’s major companies as helping to deliver results. 

Romania’s momentum

Romania’s rally has been broader, supported by rising earnings and improving liquidity. A decade ago, Bucharest equities traded at 6x earnings and yielded close to 10%, but investor concerns over governance and fiscal stability kept valuations low.

One key difference between the two markets is liquidity. The Ljubljana bourse trades around €2mn per day, compared with €15mn-20mn in Bucharest, making it harder for large institutional investors to allocate capital to Ljubljana.

“When you invest in Slovenia there is a liquidity discount,” Pulitika said. By contrast, “over the past 10 years Romania became much more popular among regional investors. A big part of the reason lies in liquidity. There are big players that want to invest into this region, and Romania has become large enough for them.” 

He also points to efforts by the Fondul Proprietatea fund in Romania, which holds stakes in numerous major companies, to promote Romania’s capital market internationally.

Momentum was further bolstered by expectations of an upgrade to emerging market status by MSCI. “A year ago, there was serious talk about Romania joining the MSCI Emerging Markets index,” Pulitika said. “Investors were taking positions in advance.” 

Now, however, the upgrade has been put on hold, as MSCI tightened its rules and political uncertainties weighed on Romania when the 2024 presidential election was cancelled. Fiscal slippage has also become a concern, with the budget deficit widening and recent tax hikes raising questions about growth. 

“The measures may surprise people unfamiliar with the situation, but the market accepted them quite well – equities are going up, bond yields are going down,” Pulitika said. “From my point of view, these steps were needed. But unless Romania improves the efficiency of the economy, raising taxes won’t be enough in the long run.”

Regional picture

The rally is not limited to Slovenia and Romania. Equity markets across Central and Eastern Europe (CEE) have posted outsized returns. Czechia’s PX is up +326% over 10 years and +41% year-to-date and Hungary’s BUX has risen +259% in a decade and +35% YTD.

“Czechia and Hungary also had very good performances, but if you look at Poland, it’s a surprise. The economy grew strongly, but equities only delivered +80% in a decade,” commented Pulitika. He blamed the relatively poor performance of the Warsaw Stock Exchange (WSE) compared to Poland’s robust growth on political decisions like taxing banks and dismantling part of the private pension system. 

Liquidity remains a structural challenge across the region, with fragmented exchanges and clearing systems. Cross-listings and integration, such as the Baltic exchanges’ cooperation, have so far failed to bring scale.

“From an investor point of view it would be much easier if markets were more unified,” Pulitika said. “It’s not just that stock exchanges aren’t connected, but the CSDs [central securities depositories] aren’t either. So it’s difficult or extremely expensive to transfer units across borders.”

Still, long-term prospects remain favourable. EU recovery funds, nearshoring of supply chains and higher defence spending are expected to funnel fresh investment into the region. Population decline – a drag for decades – has also begun to reverse in some markets as immigration inflows offset natural decrease.

“Some of the markets have had a really amazing performance. Maybe we wouldn’t bet they would grow 30-40% annually again, but we basically believe they have potential,” said Pulitika. 

“If you start from GDP potential, there is not reason why it would slow down relative to Western Europe … Further expansion [of CEE capital markets] depends a lot on what these countries can do to promote themselves,” he added. 

When it comes to downside risks, according to Pulitika “obviously the biggest risk at this point is the situation with Russia — whether the conflict in Ukraine stops, is prolonged or becomes bigger.”

Still, while Slovenia or Romania are unlikely to continue posting 30-50% annual gains, the fundamentals of these and other markets in the region suggest there will be a continued outperformance over the medium term.