Today, we decided to bring you a risk of investment overview of the CROBEX constituents, with data from the last 3 years, i.e. before COVID-19.
To calculate the risk, we calculated the standard deviation of the daily price changes of CROBEX constituents. This can be considered an indicator of risk, as the standard deviation implies the dispersion of the price from some mean. In other words, the higher the standard deviation, the higher the volatility in the price of a stock compared to a mean price point. This means that companies with the highest standard deviations are also the companies that experience the highest volatility and thus risk. So, the standard deviation can be used to measure the riskiness of investment in a stock.
When looking at the Croatian equity market, it is important to note that it is quite small. Additionally, we are looking at both some of the most liquid stocks on the ZSE and some of the less liquid stocks. This means that companies with less liquidity will inherently be riskier, as not only are their bid/ask spreads larger, but it takes less money to impact their price movements, in either direction. These issues can be reduced by increasing the number of people investing in a particular stock, and by reducing the bid/ask spread, which can be done by hiring a market maker.
Standard deviation (risk) of CROBEX constituents (end of 2019 – 2023 YTD, %)
Source: Bloomberg, InterCapital Research
The largest standard deviation in the price changes was recorded by Jadroplov, at 4.8%. They recorded an average bid/ask spread of 3.6% in the observed period and an average daily turnover of EUR 6.2k. However, only considering the trading data would not be informative, as Jadroplov is a real company with business results, both positive and negative. Jadroplov operates in the shipping industry, which has been on a roller coaster ride in recent years. (of which you can read more here). Next up, we have Ingra, which recorded a standard deviation of 3.7%, with an average bid/ask spread of 3.3% during this period, and an average daily turnover of EUR 12.3k. Following them, we have Brodogradilište Viktor Lenac, with a standard deviation of 3.3%, an average bid/ask spread of 2.5%, as well as an average turnover of EUR 7.2k.
What can this data tell us? Outside the events influencing companies themselves and their business results, companies that have wider bid/ask spreads automatically require (higher) capital to buy the same amounts of shares compared to companies with smaller bid/ask spreads. The reason is quite simple; companies with higher spreads are usually companies with low amounts of shares offered by investors at the current bid/ask prices, meaning that a relatively small amount of shares bought/sold can influence the price movement. This basically means that as an investor even if you believe one of these companies has potential if you decide to buy, then you will move the price up more than if the spread was smaller, and the number of shares offered was larger. A similar situation is present if you believe that a company is no longer investible and you want to sell your position. This is also evident if we look at the average turnover of the shares, the ones with the highest standard deviation also have on average a lower daily turnover, again implying that it does not require a lot of money to get the share price moving. Of course, one last point should not be forgotten here, the price of the company’s share also has its influence, as investing in a share worth EUR 10 or EUR 100 makes a difference, both for the number of people investing as well as the number of shares on offer, especially for retail investors.
On the other hand, of the companies with the lowest standard deviation, we have HT, with 0.9%, followed by Adris (pref.) share, at 1.2%, and Zagrebačka banka, and Atlantic Grupa, both at 1.3%. HT’s average bid/ask spread during this period amounted to 0.87%, with an average turnover of EUR 167.6k. HT also has a market maker which reduces the bid/ask spread. A similar story is present with Adris and Atlantic Grupa, while ZABA, even though it does not have a market maker, also has a really small free float of shares, meaning that even if all the available shares were traded at once, the change would not be that significant.
All of this can show us that risk is inherently tied to the liquidity of a stock, the price, and especially the price premium one has to pay on larger bid/ask spreads. A low number of investors in stock are also influencing the risk, but the largest risk is just the sheer price movements that can happen if someone decides to buy/sell a large amount of lower liquidity and lower average turnover shares. As such, besides all the issues facing companies such as the business and macroeconomic environment, as well as the companies’ results, the investors in Croatia are also facing increased risk in investing in stocks due to the above-mentioned reasons.
Here we actually come to a paradox; the thing that would really reduce the risk of investment in ZSE would be a larger number of investors, especially retail investors. And retail investors are hard to attract when the risk is high.
