A year ago, we interviewed three portfolio managers from reputable international Asset Management Companies that are actively investing in our markets as we wanted to hear their views on Croatian and Slovenian Stock markets, which you can read more about here. This year we are expanding the range of markets we want to hear their opinions on with Romania.  

Why Romania? Because it should serve as a role model in building the local capital market and Stock exchange. A major IPO is planned to happen in Romania this year. Investment fund Fondul Proprietatea will launch an initial public offering for power producer Hidroelectrica on the Bucharest exchange. Roughly 20% of the Company will be listed and the whole deal is projected to be worth 1 to 1.5 bln EUR+. Will there be any spillovers to the rest of the region? What can we learn from the Fondul structure? Spare a few minutes of your time and read what our esteemed commentators have to say.

1. Can you share your outlook for 2023 for the Croatian and Slovenian equity markets? What positive or negative effects could shape the market in your opinion? What are your top picks or top sectors you like?

Tamas Cser (Hold Asset Management): The most important driving force for 2023 in my view is how the energy situation evolves in Europe, in connection with the war in Ukraine. In the recent months there was a significant improvement, if this holds, it would be positive as European economy may avoid a recession. Otherwise, we should expect a hard year. Tourism is important especially for Croatia and it is a discretionary spending so very sensitive to the final European economical outcome.

The other (partly interrelated) important question is how strong the disinflationary process will be. If inflation turns out to be stickier then expected (which is our view), ECB will keep higher rates for longer. It can benefit the financial sector (banks, insurers), unless there is a deep recession. Insurance is the less cyclical, lower risk bet from the two. We continue to like Adris for its insurer exposure, its owner mindset and relatively low valuation.

Reino Pent (Avaron Asset Management): Given the size of the markets and economies in general we think that the 2023 developments shall follow European as well as regional markets. That said, less pessimistic views regarding economic slowdown and any major pro-Ukrainian developments could propel both markets. Naturally inflation and its toll on households’ disposable income together with tight global monetary policy will be on investors’ minds. Croatia will likely enjoy the positive kick from euro adoption, although at least in theory it should have been priced in the year(s) before.

In terms of specific names we continue to like Krka even though its Russian exposure carries some uncertainties. We treated last year’s price reaction to Ukrainian events as a buying opportunity as the company has proven it can deliver decent shareholder returns. In addition, we like NLB, which we deem favourably priced given its underlying profitability, capitalization and low credit risk metrics. Naturally with regards to NLB any unnecessary tensions and irrational geopolitics between Serbia and Kosovo are a risk, but we believe the international community will manage to downplay these in timely manner. In Croatia we continue to like tourism companies, especially Arena, which is not far from COVID lows even though business outlook looks quite strong in our opinion.

Mihkel Välja (Trigon capital): Our view is that strong tourism momentum should continue in Croatia in 2023 as well. Despite the global macro-economic downturn, it seems there is still high demand for travelling. People are simply tired of the covid years and need to spend some time abroad.
It is hard to forecast if or how is the switch to the euro helping the tourism sector, but one thing is sure, switching to euro means higher prices…
Our top picks from Croatia for 2023 would be from the tourism sector – Valamar and Adris.
In Slovenia, higher interest rates are definitely helping the banking sector in the short term and in the longer-term insurance sector as well. Thus, our top pick in Slovenia for the year of 2023 is NLB Bank. We also like the insurance companies Triglav and Sava Re.
In general, negative driver for the whole region is currently the high inflation. Banks and insurance companies are gaining from higher interest income, but other sectors will have do deal with cost increases. This will definitely pressure the margins in sectors where it is not so easy to pass through the inflation to the end customers. Or even worst, where governments are implementing price-caps, windfall taxes, etc. mechanisms to “help the people”.

2. Same question for the Romanian equity market?

Tamas: Romania is less exposed to a bad economical outcome due to its high energy self-sufficiency and lower importance of tourism. Still, the inflationary outcome is important. Also, it will be interesting to see, how the current grand coalition continues to perform. Politics could affect the market negatively, in case of increasing populist measures.

Reino: Comments regarding overall market outlook are the same as for Slovenia and Croatia, however Romania is much more open to geopolitical risk given its common border with Ukraine and Moldova, should there be any escalations or vice-versa. With respect to the capital markets this year should finally bring the listing of Hidroelectrica that could act as a catalyst for other names as well, bringing new investors to the market and creating liquidity for local investors once Fondul pays out the proceeds. Another topic that investors have long waited for is Neptun Deep’s final investment decision, which should bring more clarity about the future of Petrom and Romgaz. Our top picks in Romania are in oil and gas and banking sectors but we do see opportunities in telecom and consumer cyclicals as well.

3. Would you advise Croatian or Slovenian Governments to follow the Romanian example in setting up a Fondul Proprietatea-like structure? As a reminder to our readers, Governments could set up and IPO a Fund in which they could put in significant (not necessarily over 25%) stakes in Companies from its portfolio. All under the management of a professional international asset management company.

In your experience and view, what were the biggest benefits Fondul brought to the Romanian Capital market? Any negatives?

Tamas: Both Croatian and Slovenian equity market suffers from low liquidity and therefore low participation of international investors. Also the high involvement of the government in Slovenia is a problem, which in some cases may lead to less beneficial governance for the minorities. A structure like Fondul could indeed be a solution for this, if there is political willingness. But it need to be big enough to move the needle, to offer an interesting size for international institutional investors.

In the case of Fondul, due to its history as a restitution fund, it was large and also all the shares were allocated to retail investors who could sell it and it created a high free float. It not only improved the liquidity of the Romanian market, but due to the push of the manager Templeton, it brought western investing standards to the market and aimed for an improvement in governance for many companies.

Reino: No, since we would rather have the companies directly listed on the market as we prefer to invest in companies directly instead of via a closed-end fund or holding structure. Direct listings would create more transparency and better governance in the underlying companies. It would also reduce the discount to fair value that the state would receive during listing and investors would later usually apply on closed-end fund/holding structures.

One has to bear in mind that Fondul was created for a specific purpose, to remunerate private individuals for the assets expropriated during Ceausescu regime, so the eventual listing of it was a logical step to create better transparency of asset value and liquidity for these individuals. Pooling together stakes in SOEs just for the sake of creating a listed closed-end fund is significantly less straightforward proposal. That said, if the options are to set up such a fund or not have any listings at all, then surely the creation of such vehicle would be preferred.

Fondul eventually ended up with a very professional and dedicated manager in Tempelton, which benefited the market both via improving governance of the portfolio companies and visibility of the market via professional investor relations, communication, and events. Furthermore, the fund ended up sizable and liquid enough to make it attractive to institutional investors.

Mihkel: NO. Very bad idea. In Fondul’s case, it was inherited from the very past.
What’s more important, all of the companies that are owed by the government, should be run as they are private companies. Two good examples in our view are KRKA and NLB Bank.