Yesterday virtually all European major indices ended the trading day in red, while DAX dropped by 4.4%

Yesterday, European stocks observed the highest drop since 11 June, which came on the back of continued worries of the Covid-19 pandemic as cases surge. To put things into a perspective, virtually all European major indices ended the trading day in red, while DAX dropped by 4.4%, closing at 12,542.44 points. Banks and travel and leisure shares were the worst industry performers amid the concern of increased restrictions, sinking more than 5% each.

It is worth noting that the Croatian equity market was one of a few European markets to end the trading day in green (+0.12%). Meanwhile, the Stoxx Europe 600 Index dropped 3.2% to close at its lowest level since 31 July.

Performance of European Indices (21 Sep 2020)

Banks plunged after an investigative report on lenders’ lapses in reporting suspicious activity. To be specific, a series of leaked documents argue that more than USD 2 trillion in transactions between 1999 and 2017 were flagged by financial institutions’ internal compliance officers as possible money laundering or other criminal activity. As a result, Deutsche Bank plunged yesterday by 8.6%.

U.S. stocks also dropped, which didn’t help sentiment across Europe. The S&P500 decreased for the fourth consecutive day, representing its longest losing streak since February. As a result of the above-mentioned VIX increased by 7% ending the day at 27.65. It is also worth noting that the S&P500 has recently (up until 12 trading days ago) witnessed an almost uninterrupted 60% rally from its March lows. This led to quite stretched valuations with P/E reaching 27.8 on 2 September, surpassing levels from 2002 for the first time to reach the most expensive since 2000. Meanwhile, the index is currently traded at a P/E of 25.4

P/E ratio of S&P500

Source: Bloomberg, InterCapital Research

For the first time in history, the Romanian capital market is included, starting from  yesterday, in the Emerging Markets indices, according to the classification of the global index provider FTSE Russell.

The promotion of Romania to the Emerging Market status after 25 years from the re-establishment of the local stock exchange, a fundamental institution of the Romanian capital market, represents an unprecedented success.

Starting from 21 September (yesterday), Romania is included in the Emerging Markets indices according to the classification made by FTSE Russell, and this event was possible after the global index provider announced in September 2019 that Romania would be promoted to the Secondary Emerging Market status from the Frontier Market status. Note that the decision came after Romania had been retained on the Watch List for three consecutive years.

The BVB state that the effective promotion to the Emerging Market status will allow the Romanian capital market and economy to absorb new funds in the coming years and sends a strong signal to privately-owned and state-owned companies that they can grow significantly via the stock market. New investment funds that manage billions of euros will be able to invest in the Romanian companies listed on BVB, which was previously impossible due to the restrictions generated by the country’s former Frontier Market status.

Two Romanian companies, Banca Transilvania (TLV) and Nuclearelectrica (SNN) have met the necessary criteria to be included, starting from 21 September, in the All-Cap indices dedicated to Emerging Markets according to the classification of the global index provider FTSE Russell. The contribution of the two companies was decisive for the upgrade of the entire market, as the promotion took into account the presence of companies in the All-Cap indices (which include Large, Medium, and Small Capitalization companies, excluding the Micro-Sector).

As a result of Romania’s upgrade to the Emerging Market status by including the issuers Banca Transilvania and Nuclearelectrica in the FTSE All-Cap indices, which are representative for the upgrade to the new market status, other Romanian companies listed on the Bucharest Stock Exchange can benefit from the inclusion in the Emerging Market indices. According to the FTSE Russell classification, the first Romanian company that benefits from the market upgrade is TeraPlast. Consequently, starting from 21 September, TeraPlast becomes the first Romanian company included in the FTSE Global Micro-Cap index. The Micro-Sector is not taken into account by the global index provider in the decision regarding the country upgrade.

The aforementioned reclassification definitely seemed to have an impact on yesterday’s trading as BET ended the day in red (-2.46%). Meanwhile, Banca Transilvania witnessed quite a high decrease of 6.5%, while Nulcearelectrica ended the day in green with an increase of 1.11%. Such a decrease of TLV could arguably be attributed to the selloff by the funds who are tracking the Frontier Market index.