During the last couple of years, the Romanian capital market has undergone consistent development, attracting new investors and presenting us with a good case study – of what can be done with a focused capital development strategy, new company listings, and continued retail investor participation, supported by economic development. This has also led to strong stock returns, with many of the Romanian companies recording double-digit growth rates in the last couple of years. As such, we pose a question – is Romania still cheap today?

The question of whether a given market is cheap or not is more often than not more of a question relating to factors that wouldn’t at first hand be considered when the question is asked. Factors such as the level of economic development and stability, the country’s perception in the world, especially in terms of ease of doing business (trading and/or participating in the market), retail and institutional investor engagement, and liquidity, among many other things.

Due to this, two markets that might seem similar in terms of the companies listed, their growth prospects, etc. might end up with completely different developments. For Romania however, we have a bit of everything in the mix. A previously underdeveloped country, part of the Soviet bloc for most of the 2nd half of the 20th century, one that embraced capitalism and free market dynamics in the 1990s. With that, a lot of the issues were highlighted, and in market terms, this was mostly the lack of competitiveness due to the previous socialist policies.

However, Romania did have several aces up its sleeve; as a country located on the borderlands of the previous Soviet Union, it could act as a bridge between East and West. Furthermore, the entry into the EU and NATO allowed the country to completely focus on its development and convergence with the Western European countries. One other factor that positively influenced the country is the natural resources it had, be it in the form of hydropower, oil and gas, or even nuclear energy. With the transition to capitalism, the companies in this sector already had the infrastructure in place, and a focus on more profit-making could be made. Furthermore, as can be evidenced by the diversity of the largest Romanian companies in the main index of the country, BET, energy, finance, transportation, industrial production, real estate, or consumer goods production, the country was ripe for the growth of these industries.

Coming back to the present day, despite being next-door neighbor to Ukraine, and having its own currency which led to double-digit inflation rates during 2022/2023, the Romanian capital market proved far more resilient. The energy crisis benefited both the energy companies (through higher revenues & profits) and the Romanian state (through higher and newly imposed taxes), while banking also benefited from higher interest rates.

Global and regional indices comparison to BET (2024 vs. 2022, %)

Source: Bloomberg, InterCapital Research

As we can see, the BET index was one of the best regional and global performers, outmatched by only the CROBEX10 index, and performed significantly better than the S&P 500 and Nasdaq in the observed period. This excludes the effect of the dividends, which on average return 5-7% in BET yearly. 2024 has also started well, with a 15% return for BET, in line with most regional and global peers, only outmatched by SBITOP’s strong performance this year.

Given this, one might think that there isn’t much more room for growth, but is that the case? If we look at the fundamentals and what can be expected in the future, there might still be some “gas in the tank”. Firstly, the energy sector is seeing strong demand, especially in Europe as Russia is practically cut from the Western markets. Secondly, the banking sector is unlikely to experience stagnation, even after the interest rates return to “normal”. Lastly, the remaining companies are positioned well, and profit growth can be seen after the initial shock caused by higher costs due to inflation. If the last couple of years are anything to go by, stability and growth, especially as many of these companies are investing significant amounts into expansion, could thus also be expected in the future. Romania’s economy itself is also one of the fastest growing in the EU, while stories such as the largest IPO in Europe last year, i.e. Hidroelectrica, clearly demonstrated that there is real interest in the market. The expectation that Romania will become an emerging market soon, would also offer a significant boost from another angle – international institutional investors.

P/E, P/B comparison between BET, SBITOP and CROBEX10 (Current values)

Source: InterCapital Research

On the other hand, comparing Romania to other regional companies, we can see that it trades at lower P/E values, while at the same time, its price to book is comparable.

BET constituents 2024 YTD performance (%)

Source: Bloomberg, InterCapital Research

If we look at individual companies, we do see that there is a lot of diversification between them, with some returning negative double-digit returns, while others returned positive double-digit returns. Due to the weightings in the index, however, this ends up at positive double-digit return rates for investors, without including the dividends paid.

As such, it seems that there’s still room for growth in the Romanian market, supported by both fundamentals and stock prices. One of the more popular ways that low-risk investments into markets can be made is through ETFs. While actively managed funds allow you to choose a portfolio of choice, it usually ends up with lower returns due to higher fees. ETFs on the other hand, are passively managed, incurring lower fees, while at the same time, following the performance of the index. Furthermore, ETFs tracking Romania usually are the ones following the total return version of the index, meaning all dividends are reinvested and thus the dividend tax is avoided.

Recently, the high interest in Romania has led to a launch of ETFs tracking this on several markets, including Croatia, and Romania. Comparable investments, such as savings accounts, global markets, real estate, etc. all have their positives and negatives, but with the reduction of interest rates, it is unlikely that savings with yield strong returns. With the uncertainty in the world, especially around conflicts and the US elections, higher risk can be expected in the global markets. Lastly, real estate is becoming less and less attractive due to the ballooning entry prices, which combined with the newly announced real estate tax in Croatia, leaves much to be desired.