Yesterday, 7BET, an ETF tracking the Romanian BET-TR index started trading on the Zagreb Stock Exchange. In this quick overview, we outline the Romanian capital market as a whole, but also the benefits of investing in such an instrument.
The Romanian economy has been on a slow and steady growth trajectory since its entrance into the European Union in 2007. Supported by the ever-increasing amount of EU funds and a goal of convergence with the rest of the EU. Through this, the Romanian economy has many opportunities for continued growth. In this environment, the Romanian capital market also expanded, attracting more and more investors, both institutional but also retail.
This growth potential keeps on expanding, as starting yesterday, 31 May 2023, 7BET ETF launched on the Zagreb Stock Exchange. So to answer a few questions, what is this ETF, what does it track and how does it work exactly?
The 7BET ETF is an ETF, alike to the 7CRO and 7SLO ETFs already listed on the Zagreb Stock Exchange. This ETF tracks the movements of the BET-TR index. Not only does it track the main index of the Romanian Stock Exchange, but it actually tracks the total return form of this index, meaning all the dividends that are paid out by the index constituents are immediately reinvested, and as such no dividend tax has to be paid. Furthermore, as this is an ETF, it is passively managed, meaning that the cost of investment is marginal, while the overall risk is reduced due to it tracking a wide index, comprised of 20 companies.
Also, the index is denominated in euros instead of the Romanian currency (RON), meaning you can track the value of your investment in hard currency and domestic currency of all EMU countries including Croatia. Even though all the results are in the local currency, it by itself has an informal peg to Euro (as was formerly in Croatia) and Romania has a very prudent financial regulator in its central bank, which has a very pragmatic approach. Foreign currency reserves have been increasing throughout the period. Furthermore, the ETF has a dedicated market-maker, meaning that the bid/ask spread is going to be extremely low, at 0.2% to be precise. This is significantly lower than the majority of the individual constituents of the index, and even if one invested in all of the individual members, they would not be able to match this low-cost profile. Finally, the BET index offers an attractive dividend yield of 3.6% thus far in 2023, but we would like to stress that several companies have yet to propose or approve their dividends for the year, meaning that one could expect an even higher dividend yield going forward. As a point of reference, the DY in 2022 amounted to 5.8%, and based on estimates by Bloomberg, it should amount to even higher than this when all the dividends are proposed.
Bid/ask spread of individual BET constituents and 7BET ETF
Source: Bloomberg, InterCapital Research
Taking a look at the BET index, it is comprised of 20 companies, with app. one-third of the index being energy companies, one-fourth being banks, and the remainder spread out between many industries, incl. real estate, pharma, wine production, transport, etc. As such, not only is the index wide when considering the number of companies but it is also spread out across many sectors.
Current P/E of select indices
Source: Bloomberg, InterCapital Research
Also, the index has been trading at a discount compared to many other indices, both its regional peers as well as global giants. As we can see in the graph above, compared to all the indices, both regional (e.g. Croatia, Slovenia, Poland, Hungary), but also global (S&P500, DAX), and even specific MSCI indices tracking frontier and emerging markets, BET is trading at a discount, at 4.63x P/E to be exact. As a point of comparison, the main Hungarian index is trading at 5.27x, and the main Polish index WIG20 at 6.34x.
The reasons for this are numerous. Firstly, as Romania only started developing its capital market in the 1990s, which was effectively supported by the inclusion in the EU in 2007, it is expected that it was lagging behind. Furthermore, because of this lag, Romania had (and still has) a lot of room for growth. In 2022 GDP grew by 4.7% and it ranked 11th in the EU by GDP growth, while in the next two years, expected growth is above 3%, so the outlook is very robust. Considering that there aren’t any true “growth” companies in the index, the share price of the companies is more correlated to earnings growth in Romania, than in other countries. Still, it has to be noted that liquidity still remains an issue, but the situation is a lot better than in for example Croatia or Slovenia, with several companies even outpacing the overall turnover of these exchanges by themselves.
Average daily turnover of BET constituents in 2023 (EUR ‘000)
Source: Bloomberg, InterCapital Research
Lastly, there is more positive news on the horizon. First of all, the listing of Hidroelectrica. Hidroelectrica, as a company that is part of the Fondul Proprietatea fund, is one of the largest energy producers in Romania. Because of its size and importance, if it were listed on the exchange, its market cap would amount to app. EUR 11bn. Also, once listed, it would become part of the BET index. The listing of the Company, the whole process is currently underway, and more details should come to light this quarter. Also, the Romanian state published its strategy for the growth of the capital markets for the coming period, meaning that not only is the market itself growing, there is continued state support, and new IPOs. Finally, all of this would lead to Romania’s classification as an Emerging market by MSCI, an upgrade from its current Frontier market status. This would attract even more foreign investors into the country, meaning that overall, the growth prospects are extremely positive. Taken together, this would mean that investing in Romania could turn out to be quite profitable in the coming period, and investing in an attractive ETF that tracks the movements of the most important Romanian companies seems like a solid development for the overall capital markets, giving investors even more opportunities to diversify and improve their returns.
