CE Financial Observer talks to Ludwik Sobolewski, the CEO of the Bucharest Stock Exchange, about capital market and economy of Romania.
CE Financial Observer: Do you think the Bucharest Stock Exchange will become an “emerging market” (in MSCI rank) in 2016?
Ludwik Sobolewski: It is not feasible, for two reasons. The first one is that we are still in the course of building a supply of sufficiently large companies, in MSCI terms, in the sense of the market value, of the value of the free float and of average daily liquidity. Now it mainly depends on the increase of the free float of already listed companies, and on one specific primary market transaction (an IPO) that should be completed and for which the time horizon is the second half of 2016, not earlier.
The second reason is that the “upgrade” of a country and the market leads through a given country to first be put on a observation list (a “watchlist”), where it normally stays at least one year, because MSCI (and other providers of such ratings) highly appreciates the irreversibility of the changes they decide upon.
The BET index constantly grows. It’s far more than BUX (plus 16 per cent) or SOFIX (plus 33 per cent). Romania is like Baltic states. What are the main drivers of that growth?
I have somewhat less rosy assessment of the evolution of the indexes on our markets in Romania, but, indeed, Romanian capital market showed its strengths in the medium term, from the historical perspective. Firstly, the valuation of assets improves. In parallel, and I think that this is one of the most important indicators for anybody who would like to take a position on the Romanian equities market, the P/E ratio of our listed companies amounts to circa 7, and is the lowest in the CEE region.
One of the causes of this under-valuation is still a low liquidity (it is more difficult to enhance the valuation when the trading activity is relatively low) and this label of a “frontier” market. On the other hand, it is not a fully satisfying explanation, because for instance Bulgaria or Croatia are classified as frontier markets, too, yet their P/Es are considerably higher – moreover, with the turnover many times lower than in Bucharest. In addition, Romanian listed companies generate the highest dividend yield in the whole CEE region. All in all, Romanian capital market is the market of the future. Not of a very remote future, I do believe.
After PM Victor Ponta resigned there is a lot of noise around forming the new government, do you think changes in tax code that envisage scrapping tax on dividends from 16 per cent to 5 per cent would be implemented from the beginning of 2016?
There is no threat or risk that they will not be implemented. Romania is a politically stable country. Changes of the government may occur, and recently it happened amid fairly high tensions, but the political and institutional system has worked and is well anchored.
And what are the main actions that the management of BSE undertakes that lead to boosting the trading volumes and to make the environment more open? You launched new website which is now delivering full information, you created AeRO – the alternative trading market for start-ups and SMEs. What’s more?
We deploy a lot of actions and projects in parallel, addressing various areas where we can strengthen the capital market. To name only some of main lines of development: changes in the trading and post-trading architecture, market-making mechanisms, international road-shows, reaching-out to individual investors through incentives relating to trading and education, attracting new issuers to the exchange, introducing new standards of corporate governance, regulatory changes reducing the barriers impeding the flows of capital, and truly may others.
In a situation which we have in Romania – a country with an impressive but unexploited potential over years, you must run many projects and developments more or less simultaneously in order to get the “engine” started. And, in other words, to cope with indifference or negative emotional mindset, because the society at large is many years ahead of the capital markets, which has lagged behind the development in some other domains of social and economical life.
International media and experts praise Romania all the time. The unemployment rate is low (below 7 per cent), Romania is also the leader of growth in retail trade, has good position in rankings like DoingBusiness and so on. But how does the life of average Romaniam look like? We read the wages are low and large proportion of people earn less than average.
Romania has many faces. It is a more heterogeneous country than Poland is. Transilvania, with a strong Romanian “Sillicon Valley” in Cluj and the elegant Sibiu, is culturally different than Valachia with the country’s capital, cosmopolitan and lively Bucharest, where GDP per capita is at the level of Warsaw, if not higher. Romanian Moldova is the poorest region, yet with vibrant Iasi as a new economic point on the map. Romania is one of the lowest-income countries in the EU, which comes in a combination with, for instance, the best capacity of internet connections in the EU (together with Estonia), you can pay with bitcoins in a number of restaurants in Bucharest and exquisite competences as regards the command of foreign languages.
Did you follow the debate over people’s participation in economic growth in Poland? There is a big pressure in Poland to raise salaries. We can see the same in Bulgaria where people protested over proposed salaries’ cuts. And the same is in Romania, of which lots of people are working abroad. What’s the growth model for Romania? It seems like high yields, low pay.
Romania’s political establishment is aware of the fact that deep reforms and changes must be undertaken. One of the challenges is to improve the state of the transport, including the roads. Health service is another structural problem. Romania faces negative tendencies in demography and it already affects the growth (even if the country has one of the highest GDP growth indicators in Europe). Productivity of Romanian companies, especially state-owned, must be enhanced. Romania registered weak level of the EU funds absorption, and this is obviously another area with a great potential for a sustainable growth. In a more general way I would say that Romania has wasted a lot of time, especially in the 90s, and now, once having got out of the deep recession during the recent global financial crisis, is catching up quite fast with the model of more advanced economies and with those neighbours which had accomplished more when restructuring its economies.
So it’s similar. And would it work for as long as it worked in Poland?
There is a chance that years to come will be marked by an uninterrupted growth and modernisation. But we never know what the future would look like, especially when capitalism is really global and we are all in the same boat.
There are less than 100 companies listed on BVB’s regulated market. Can you forecast when would this result be doubled?
We list over 80 companies on the main market, and close to 300 on the AeRO platform. The number of companies is of course one of important indicators, but in the Romanian and CEE context – meaning, for all stock exchange of this transformative geography, other parameters are more telling: the market capitalization, liquidity levels and the turnover, as well as the existence or non-existence of the capital markets in equities, in debt tradable instruments and in derivative instruments. Bucharest Stock Exchange lists companies of the aggregate value exceeding now the market cap of the Budapest marketplace and approaches Prague Stock Exchange, but the turnover is still lower than on those two markets. On the other hand, the market is already less concentrated than in those two markets of our peer category, in the sense that a the turnover in 5 top companies is more balanced. We have a nascent market for the corporate bonds, but derivatives are still the segment to be launched in a bit more distant future.
Which sectors grow the most dynamically in Romania? In which sectors IPOs are expected?
The dominant sectors are energy, utilities, IT, services and agriculture. The cost of listing is not an issue at all. The problem lies in the customers base. Foreign investors naturally invest in large and selected mid-caps with the lowest possible liquidity risk. The formation of local institutional capital (pension and investment funds) is progressing, but the overall assets under management are attaining roughly only15 bil EUR, and only a small part is invested in equities (20 per cent of the pension funds’ assets, 5 per cent of investment funds, mainly abroad). Romanians keep close to EUR60bn on the bank accounts and the conversion of a part of these funds into more advanced financial products is one of they key factors for the acceleration of the IPOs market.
And which sectors are the most interesting for foreign capital to invest in?
An investor looking for defensive stocks, giving a good dividend yield, should look at Romania. For others, thinking about consumer stocks, where returns hinge to some extent on the growing wealth of the population whose size is meaningful (around 20 mil within the borders of Romania), the country is one of the most attractive investment territories across the European and global univers of young markets.
Let’s look at other CEE countries. What are the reasons, in your opinion, of WIG20’s underperformance in the recent years (WIG is still falling)?
Warsaw indexes have been for a while in the side-trend (lateral one), I would rather say. It is undoubtedly a result of external and domestic causes and the projections and sentiments the community of investors have had. The main question mark, relates not to the level of indexes, but to the strategy for further development of the Warsaw Stock Exchange. This is a defining aspect for the future.
Francis Malige, a managing director of European Bank for Reconstruction and Development, asked about the future of Ukrainian capital market told Interfax “the restructuring has been hanging over the future of Ukraine and investment in the country like a dark cloud. Now, when the deal is done (…) investors have visibility”. He was referring to the deal of Ukrainian government and the private sector creditors on restructuring the debt. Do you agree? How quickly will foreign capital flow into Ukrainian market and what requirements have to be met?
I understand this optimistic emotion, but for me Ukraine is a big uncertainty at present. I would not say that it has a long way to pass, because this would be a kind of a cliché – this country has a lot of advantages that could in a formidable manner shorten that evolution. Wise polices and determination are definitely indispensable. EBRD involvement is one of the more important factors there but certainly not a sufficient one.
Can you imagine Ukraine’s exchange being ever a competition for Bucharest Stock Exchange?
A modern, strong and attractive capital market in the Ukraine is in the best interest of the Bucharest Stock Exchange and many other markets in the region. I hope it will become a reality fairly soon.
What’s the level of the financial literacy in Romania? Can you compare the financial literacy of Romanians to this of Poles?
Question of impressions mainly. For some time I had a view that the level of the financial literacy is much lower in Romania than it is in Poland. Currently, I tend to revise this view or to express it in a more nuanced form: the knowledge and awareness about the stock market, its mechanics, practices and rules, is lower than in Poland. But the understanding of risks, this intuitive layer of the perception regarding the financial instruments, all this culturally conditioned fears and convictions about how the financial markets work, and what they can produce for the sake of the population, resemble the respective set of ideas in Poland, with a certain intuitive insight. With that subtle difference, perhaps, that Romanians are slightly more pessimistic or sceptical than the Poles in their thinking about how the use of financial products can improve the quality of life.
After the peak in the period 2010-2011, the number of individual brokerage accounts in Poland felled sharply. Now (in November 2015) the National Depository for Securities (KDPW) reports on recovery in that field. There are approx. 1.5m of brokerage accounts in Poland in 2015. And what does the individual participation in the equities market look like in Romania?
We have roughly 20 thousands active international investors. With around 70 thousands of securities accounts in total. And around 8 millions (yes, millions) of individual accounts at the level of the central securities depository, as a legacy of the mass privatization program from the 90′. One of the big aims is to activate those holdings.
Do you follow the debate that commenters run in Financial Times and other leading economic titles on what is an “emerging market” and what’s not an “emerging market” anymore. Do you agree Poland is not the subject of such a nomenclature?
I think that the category of “emerging markets” is so internally diverse, if not disparate, that the term becomes increasingly conventional and its informative content is much more compound than it used to be. It goes even beyond the notion of emerging markets, extending to the category of frontier markets. Romania is an incomparably less risky country as an investment territory, than, say, Nigeria, Vietnam or Argentina, meaning that it represents, in my view, all the characteristics of an emerging market (from that point of view – a qualitative one), yet it is in the same category as countries which I mentioned above.
Poland in my view is closer to the category of developed markets, than to the emerging ones. But the main observation would be that traditionally the higher within this “ladder” we were, the more appealing markets were situated there. Now it is not that clear anymore. We have a lot of markets classified as “developed” which from several angles and across many criteria combined prove to be much less attractive than some of the “emerging markets”, even putting together and mixing up all sorts of investors’ types.
Ludwik Sobolewski – the CEO of the Bucharest Stock Exchange, Romania, and the former CEO of Warsaw Stock Exchange.