By Clare Nuttall
It’s always an unexpected — and sadly rather rare — pleasure when doing my job requires me to drink wine at 11am. The last time this happened was at the initial public offering (IPO) of Moldova’s Purcari Winery Group on the Bucharest stock exchange in February.
This was the first ever IPO by a company from Moldova, one of Europe’s poorest countries that is very much off the map for most investors, but it was also a new landmark for the Bucharest exchange, whose managers have been working hard to persuade more companies to list and entice investors — including Romanian retail investors — to put their money to work there.
After the bell was rung to mark the start of the trading day, I sat down (glass of pink sparkling wine in hand) with one of the investors behind Purcari, who explained that the decision to hold the IPO in Bucharest was largely because of the momentum created by a string of recent IPOs, most of them in the consumer sector. Combined with Romania’s stunning 7% GDP growth last year, this led to a surge of interest among international investors.
It’s still not of a size to compete with the regional champion in Warsaw, but the efforts that kicked off a few years ago with the Eight Barriers programme aimed at removing obstacles to investment are now showing results. 2017 saw no less than four IPOs worth over a quarter billion euros in total, while the market capitalisation of the companies listed on the Bucharest exchange’s main market passed the €35bn mark for the first time, and transaction volumes were 28% over the average of the last 10 years. The positive trend continued into January this year, when the Bucharest exchange ended the month with its main index, the BET, rising by almost 8%, which was the second highest growth rate in the EU after the Athens stock exchange.
A more active stock exchange means it’s an increasingly viable alternative to bank finance for growing companies. But while there has been some success in persuading companies to list in Bucharest, convincing more Romanians to put their money to work via the stock exchange rather than saving it in banks is still a work in progress.
At his first press conference after taking over at the helm of the exchange in January, its new CEO Alex Tănase talked of the need to convince the population that investing on the exchange can be “as commonplace as a bank deposit” but can yield higher returns. This is likely to be an uphill struggle even though companies listed on the Bucharest exchange paid an average dividend yield of 8% in 2016, which was the highest in the world according to market research company Berenberg. Surveys have shown a high level of pessimism and risk aversion among consumers, which the exchange is trying to reverse this with various financial literacy programmes.
All this is needed if the Bucharest exchange is to secure an upgrade to emerging market status, from its current position as a frontier market, which means it’s shunned by more risk averse investors. An upgrade would put it on the same level as its regional peers in Budapest, Prague and Warsaw, and would also ensure a flood of money from international institutional investors, potentially hiking market capitalisation to 15%-20% of GDP, compared to 12% in 2017.
For this to happen, however, liquidity needs to increase considerably, and private sector listings and more retail investment aren’t enough. The real breakthrough is expected to come when Romanian hydropower giant Hidroelectrica holds its long-anticipated IPO. The sheer size of Hidroelectrica is expected to give the local exchange a sufficient boost in liquidity for it to be seriously considered for an upgrade to the emerging markets category.
But with plans for the Hidroelectrica IPO bogged down in political wrangling and legal disputes between the government and the company’s main minority shareholder, it isn’t likely to happen before next year at the earliest. This means that while the Bucharest exchange has come a long way in the last few years, breaking open the champagne to toast its success may be a little premature.
Clare Nuttall is a Bucharest-based journalist specialising in Eastern Europe. Currently news editor at bne IntelliNews, she has been with the magazine since 2008, initially in Kazakhstan and more recently in Romania. Clare has also written for the Financial Times and the Economist Intelligence Unit.