Yesterday, we brought you the analysis of the bid/ask spread of the Croatian and Slovenian blue chips, which you can find here. Today, we’re bringing you an overview of the Romanian blue chips.
In comparison to the Croatian and Slovenian stock exchanges, while small compared to developed market standards, the Bucharest Stock Exchange is quite large. Its main index is composed of 20 blue chips, as compared to 10 in Croatia, and 9 in Slovenia.
Most of these companies have solid liquidity on the market, and the retail investor participation is a lot higher. Due to these factors, Romanian companies are easier to trade, especially in larger quantities. As such, it isn’t surprising when we look at the average bid/ask spread of these companies: for all of them, it’s below 1%.
Average bid/ask spread of Romanian blue chips in 2023 (%)*
Source: Bloomberg, InterCapital Research
*Hidroelectrica’s bid/ask calculated as of listing in July 2023
Furthermore, most of these companies, 15 to be exact have at least one dedicated market maker. Several of these have 2, and Fondul Proprietatea has 3. Even if we were to look at the bid/ask spread on certain days, it mostly ranges between 0% and 3% for these companies, with only several ranging above this level.
Price change of Romanian blue chips in 2023 (%)*
Source: Bloomberg, InterCapital Research
*Hidroelectrica’s price change as of listing in July 2023
What is really interesting, however, is that this bid/ask was maintained even though most of the companies recorded significant growth during the year, with 16 out of 20 companies recording >10% growth, 9 companies recording over 30%, and 1 company recording triple-digit growth. Fondul Proprietatea on the other hand, recorded a decline in value but this is related to the IPO of Hidroelectrica and the subsequent dividend payment from the proceeds of the IPO, which reduced the value of the Fund.
To achieve this overall growth, the Romanian blue chips had to have a lot of days of price growth during 2023, and on those days the volatility of the bid/ask spread was wider, but still small. This is one of the many advantages of a more developed market, and it creates a positive loop of further development. Good liquidity and low costs (such as transaction costs in the bid/ask) attract more retail investors whose participation increases liquidity, and the cycle continues.
Of course, other factors play a role, such as regulations and laws, but especially a strategy of capital development. Furthermore, given the listing of Hidroelectrica and the size of other companies, Romania is also set to be given an Emerging market status, which would attract even more investors, especially foreign.
Taking all of this together, some lessons could be applied to other regional markets. As we can see from Romania’s case, it’s many different things working in unison that drive the development. While strides are taken in Croatia and Slovenia as well, more could be done, like defining the capital market development strategy as well.
During 2023, Croatian mutual funds NAV ended the year with a 5.8% YoY growth. Even though NAV was mostly in the red during the year, a noteworthy growth of 7.2% MoM in December 2023 led to the YoY data also turning positive. It is due to the fact that net contributions finally started increasing, with EUR 118.4m recorded in December alone, and EUR 78.4m recorded during 2023. As such, of the 5.8% growth recorded YoY, 3.6% came from the higher net contributions. For comparison sake, net contributions were negative in 2022 and amounted to EUR -455m. As such, while the 2023 increase is a positive sign for the funds, it still has a ways to go before recovering what was lost in 2022.
According to the latest release by the Croatian Financial Services Supervisory Agency, i.e. HANFA, the Croatian mutual funds recorded an increase of 7.2% MoM, and 5.8% YoY at the end of December 2023, with the NAV amounting to EUR 2.3bn. This marks a significant departure from the majority of 2023, during which most of the YoY growth was negative due to the macroeconomic and geopolitical situation which negatively influenced the overall sentiment across capital markets. This would also mean that compared to their pre-COVID-19 level, the mutual funds’ NAV is app. 26% lower.
To see what drove these changes within the mutual funds, one should take a closer look at the assets within the funds, and how they changed. Starting off with the MoM data, the largest increase in assets was recorded by deposits and cash, which grew by a noteworthy EUR 105.4m, or 50.2%. following them, there are bonds at EUR 34.7m, or 2.6%, shares at EUR 12.7m, or 3.6%, and investment funds, at EUR 8.7m, or 4.5%.
Moving on to the YoY data, the largest increase here was recorded by shares, which grew by EUR 88.9m, or 32%. Following them are bonds at EUR 63m, or 4.9%, receivables at EUR 20.8m, or over 11x, and inv. funds, at EUR 14.6m, or 7.8%. On the other hand, deposits and cash decreased by EUR 60.9m or 16.2%.
Total assets of Croatian mutual funds (January 2015 – December 2023, EURm)
Source: HANFA, InterCapital Research
However, one has to note the massive impact that the net contributions to the funds also had. In December 2023, they amounted to EUR 118.4m, while in the last twelve months, they amounted to EUR 78.4m. As such, higher net contributions contributed significantly to the recovery of the funds, leading to them recording higher levels than at the end of 2022. 2022 by itself should be noted, was a really bad year for the funds, as they recorded net redemptions (negative net contributions) of EUR 455m during the year. As such, the EUR 78.4m was the start of a recovery, but it still has ways to go to recover the ground lost in the previous year. Due to these positive net contributions, of the 5.8% YoY growth in the mutual funds’ NAV, 3.6 p.p. came from net contributions.
Net contributions to the Croatian mutual funds (January 2021 – December 2023, EURm)
Source: HANFA, InterCapital Research
Taking all of this data together, we can see how big of a role sentiment on the market plays in the performance of the funds. When it is positive, people continue investing in the funds, especially in a longer time period. On the other hand, when the sentiment is bad, net redemptions from the funds are significantly higher, or in other words, people are leaving/reducing their stakes in the funds. While this might seem like a logical thing to do, let’s draw a parallel to the stock market. When the times are good, the stock market will generally experience an upward trend, and vice versa also happens during negative times. Extended periods of good times usually lead to all-time highs in the stock market, while extended periods of negative times usually reset the market to a lower, cheaper level. In other words, buying when the times are good, and selling when the times are bad might not seem like the best strategy, especially in the longer time period.
Coming back to the Croatian mutual funds, in their current asset structure we can see a reduction in most categories except for the deposits and cash. Still, bonds held the highest share at 58.9%, decreasing by 2.7 p.p. MoM, and 0.7 p.p. YoY. Following them are shares at 15.9%, with a decline of 0.57 p.p. MoM, but an increase of 3.1 p.p. YoY, as well as deposits and cash, which held 13.6% of the total, increasing by 3.9 p.p. MoM, but decreasing by 3.6 p.p. YoY. Finally, we have investment funds at 8.8%, with a decrease of 0.2 p.p. MoM, but an increase of 0.13 p.p. YoY.
Current AUM of Croatian mutual funds (% of the total, December 2023)
Source: HANFA, InterCapital Research
One shouldn’t be surprised by this development, however, as deposits and cash are the most liquid type of assets observed in these funds. Furthermore, they are the least risky type of assets and currently offer solid returns on that low risk.