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bne March 2020 Companies & Markets I 15
While not mandatory, we were pleased to see Romanian companies largely accommodating the proposal, and
many private companies also increasing dividend payouts substantially. As dividends are paid from recurring cash flows, the leverage of most companies has not increased. We expect a dividend yield for the index for 2020 of 8%, among the highest in our universe, and clearly extremely appealing in the world of ultra-low global yields. The market trades at an attractive valuation of single-digit P/E of 9x, backed by solid economic growth, and is poised to test new highs in 2020.
The good news for investors is that the opportunity set also expanded. After years of absence, IPOs on Bucharest Stock Exchange during the last 3 years have broadened the range of investment opportunities in different sectors that are directly exposed to domestic economy. Some examples are: a leading private healthcare company (MedLife), a leading cable & telecom operator (Digi Communications), one of the leading wine producers (Purcari Wineries), and a chain of fast food restaurants (Sphera Franchise Group). While typically small and less liquid, these companies are characterised by solid revenue growth that in most cases exceeds 25%.
The market also has the support of local investors. Although the participation of domestic retail investors is still fairly limited, local pension funds create a decent base for the
local equity market. As of H1 2019, the total assets managed by private pension funds (mandatory and voluntary) in Romania had reached €12bn, up almost 26% y/y, according to data released by the Financial Supervisory Authority.
With concerns around the dismantling of the pension system largely gone after the new government reversed the decrees introduced in late 2018, the steady inflow into funds will continue and therefore the local institutional investors will play an increasingly important role in the market going forward. At the moment, the size of pension funds’ assets is
a mere 5.8% of GDP, only a fraction of Western European levels, but is expected to increase significantly over the next
5 years. As a result of improved liquidity and increased market capitalisation in recent years, the Bucharest Stock Exchange has been promoted to emerging market status by FTSE Russell in September 2019, but is still a frontier market according to MSCI.
What can go wrong?
The key risks associated with the country include an unpredictable and imprudent budget and fiscal policy, grappling with the fallout from the continuing anti-corruption efforts and demographics. Economic policy makers need
to tackle the challenges in a clear and predictable manner without disturbing financial markets with unexpected, unfriendly actions like those we witnessed towards the end of 2018. In the longer run, the country will have to attract more investments to escape the middle-income trap, seen so often in the countries that have reached the level of development Romania is currently at.
Bulgaria’s parliament gives green light to central bank law needed for entry into ERM2
Denitsa Koseva in Sofia
Bulgaria’s parliament adopted legislation to align its law on the central bank with the requirements of the European Central Bank (ECB) in its second reading on February 6, in order to join the Exchange Rate Mechanism (ERM II).
The law, proposed by the government in January, raised some concerns as it would allow other member states to require a change of the rate of the Bulgarian lev against the euro. Currently, the Bulgarian lev is pegged to the euro under the currency board regulations, which have secured stability to the local currency for years.
According to the law, which was also approved by the ECB, the exchange rate can be changed upon request by other member states. However, to prevent an exchange rate that would harm the local economy, earlier in Feb- ruary Bulgaria’s parliament obliged the finance minister and central bank governor to negotiate the country’s future membership in the Eurozone at the current exchange rate.
The country has already applied for membership in ERM2 and the European banking union, and meets
the nominal criteria to adopt the European common currency, with its currency, the Bulgarian lev, pegged
to the euro, low inflation and healthy public finances. However, the EU has demanded that Bulgaria also check its banking system due to suspicions that some locally- owned banks are not stable enough.
In October 2019, Elke König, head of the European Banking Restructuring Council, said that Bulgaria could join ERM2 in the first or second quarter of 2020.
At the end of January, International Monetary Fund (IMF) head Kristalina Georgieva said that Bulgaria could join the eurozone in 2023. However, Georgieva pointed out that eurozone entry in 2023 could happen only if the country joins ERM2 this spring.
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