Monday, October 15, 2012

FT: Fund file: Romania privatisation hope

Given all the eurozone bad press, it is unusual to hear from a man who can’t wait for the day when his country enters into the single currency.

But, as a report in Monday’s FTfm explains, for one Romanian fund manager euro entry would usher in a future with more freedom.

“Our lives should be less in the hands of the politicians and more dependent on the real economy,” says Dragos Valentin Neascu, chief executive of Erste Asset Management in Bucharest.

To achieve that, Romania needs more developed financial markets – hence Neascu’s dream of euro entry.

“The technical criteria associated with euro adoption are very important,” says Neascu. “They are more important than the euro itself. They will make us more predictable as a [bond] issuer. Then companies can finance themselves on the local market and internationally.”

For the moment, however, Romania is lurking in a no-man’s land from an investment point of view.

Changes of government and political squabbling have meant that a programme of reforms agreed with the IMF, including a series of privatisations, has stalled. The Romanian currency, the leu, has also come under pressure against the euro, falling 5.3 per cent this year and hitting a record low in July.

The privatisation programme is seen as critical to broadening choice on the stock market and improving liquidity. Overall, the market capitalisation and liquidity of the equity market would have tripled had the programme gone ahead, says András Szálkai, fund manager in the emerging markets equities team at Raiffeisen Capital Management.

The disappointment is palpable. “At the beginning of the year, it looked like Romania would be a good story for equity investors,” says Szálkai. “Until May the stock market was up 25 per cent in US dollar terms.”

Hopes are now pinned on the December 9 general election. If it delivers a clear result and the privatisation programme resumes, managers are expecting a range of benefits including a number of new listings on the stock exchange.

“Investment bankers have drawn up plans to list family businesses that have developed over the past 10 to 15 years in sectors such as pharmaceuticals and tourism, but these exercises have not been concluded,” says Neascu.

Deepening the stock market could draw some investors in from the sidelines. Foreign investors are currently deterred, not only by Romania’s many well publicised problems, but also because “it is difficult to invest in domestic consumption stories or companies offering strong top-line growth”, says David Wickham, investment director, emerging markets at HSBC Global Asset Management.

A broader listing base could also help the development of domestic institutional investors such as pension funds and mutual funds, which would boost liquidity.

Until then, Romania must grapple with its reputation of being in the wrong place at the wrong time. Its near-term performance is seen as being closely tied to the eurozone crisis with close links to Greece, particularly in the financial sector. GDP, from a healthy 7 per cent before the financial crisis is now struggling to reach 1 per cent.

For emerging market investors all that bad news might sound like good news. Prices, they might reason, are probably depressed. Indeed, even those who bet on Romanian equities this year, would not have lost their shirts.

While it is true that the Bucharest Stock Exchange Trading Index suffered a fall of nearly 20 per cent from May to its low in June but it has since recovered to a respectable gain of about 11 per cent year to date.

But for the Romanian based managers looking at long term business models, a fortunate result from the December elections sounds like a must-have.

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