As 2022 has finally come to an end, we decided to bring you a brief analysis of how the Croatian equity market performed during the year.

2022 could be considered a very peculiar year. Not only was it a year of the culmination of various trends (the end of COVID-19, being the primary), but it also saw major developments in trends that are still lasting (i.e., inflation). It was also a year marking an event on Europe territory that hasn’t happened since the end of WW2. That is of course Russian invasion of Ukraine that ending up being a large-scale war in Europe, lasting already more than 10 months. It seems like in hindsight, all of these things were either bound to happen, or you could find reasons why they did happen.

We had a long period of lock-downs, travel restrictions, new vaccine introductions, and new variants of the pandemic. As the situation developed, it could be said that it was “obvious” that COVID-19 would end. And it could be said that by the end of 2022 (if we include China’s recent decision to end its COVID-19 restrictions) this did happen. Inflation, given the amount of stimulus to households and companies, the quantitative easing, the supply chain disruptions, and of course, the war in Ukraine, seemed like a no-brainer, looking back.

Even the war in Ukraine, looking at months of military build-up and escalation of threats, and “red lines” from all sides involved, now seemed to have bound to happen. Yet when all of these situations were developing, no one could have said for sure how they would have developed.

For financial markets, 2022 also marked a year of a massive U-turn, with the end of quantitative easing, the beginning of quantitative tightening, and the increase in interest rates. This trend was first started by the Fed and followed by other central banks in the world, including the ECB, one of the most dovish central banks (up to the middle of 2022). In this environment, the “transitory inflation” became a “recession with a soft landing” to a “recession with a hard landing” to whatever the future now holds, as data can be found to support either way. This was of course driven by the plethora of negative news that we have witnessed during the year, from start of recession to cryptocurrency meltdown. And it there is one thing that equity markets don’t like, it’s the continued negative sentiment that never seems to come to an end.

In this environment, how did the Croatian equity market perform?

Source: Bloomberg, ZSE, InterCapital Research

In 2022, the largest index representing Croatia, CROBEX, declined by 4.8%. However, this decline is one of the lower ones recorded on the equity markets, as many international, and more famous indices like the S&P500, Nasdaq, and DAX, all declined by double-digit numbers. Even regional indices, like SBITOP, recorded double-digit (-16.9%) decreases. Unfortunately, the main reason that this decline is lower in Croatia is stemming from the fact that on Croatian equity market slower rebound after pandemic in 2021 was evidenced compared to regional indexes. E.g. CROBEX was up 19% in 2021 while in 2022 it was down 5%. On the other hand, SBITOP and BET in 2021 were up 40% and 33%, while in 2022 they were down 17% and 11%. Lower drop in 2022 of CROBEX compared to its peers was also due to the lower liquidity on the ZSE, meaning that even when negative news happened, the decline was not as severe as on the more liquid markets. This is even more apparent if we look at the daily changes of the CROBEX index.

CROBEX daily price change in 2022 (%)

Source: Bloomberg, InterCapital Research

As we can see in the chart above, the largest daily decline of the index was recorded on 24 February 2022, with the start of the Russian invasion of Ukraine. On that day, CROBEX declined by 6.48%. However, only a day later, the index recorded the largest increase in the year, growing by 2.98%, almost signaling towards things not being as awful as they seem. On a yearly basis, the average daily price change was negative -0.02%, while the average turnover amounted to EUR 1.48m. Also, in terms of the turnover, one other thing has to be pointed out, and that is the importance of the block trades in the equity turnover. In 2022, on average, the block turnover amounted to 35.8% of the total equity turnover. However, it should be noted that 3 months did not record any equity turnover, while September and October had block turnover which accounted for more than 60% of the total equity turnover. This was due to the Tankerska Plovidba (the then majority shareholder of Tankerska Next Generation) decided to start buying large amounts of shares of TPNG, in order to attain majority share, following up with a squeeze-out and de-listing by the end of the year.

Performance of CROBEX constituents in 2022 (%)

Source: Bloomberg, InterCapital Research

Moving on to the performance of the CROBEX constituents, a couple of things have to be pointed out. First of all, the best performer in the index, TPNG, was not included due to it not being listed on the Exchange any longer. If it was, it would have recorded an increase of 85% in 2022. Secondly, the liquidity issue is also one that is apparent here, as some companies recorded increases/decreases which were more driven by the price change due to lack of liquidity than anything else. With that out of the way, the largest growth in the index was recorded by Viktor Lenac, with an increase of 83%. While the Company did record solid results in 9M 2022, the liquidity factor also had an influence here. Following them, we have Ingra, which recorded an increase of 51.6%, again under the influence of solid business results, followed by Jadroplov, which increased by 17.5%, Span, which grew by 15.52%, and Plava Laguna, which increased by 15.48%. Out of all of these companies, the one that could truly be said experienced growth because of its positive business results and not lack of liquidity is Span, which at times recorded liquidity comparable to the largest Croatian blue chips.

On the other hand, AD Plastik recorded the largest decline, at 52%, followed by Arena Hospitality Group, with 20.7%, and Atlantic Grupa, with 18.6%. The stories of these companies are quite different. AD Plastik’s decline came mostly as a result of the deteriorating business environment, something that started in 2021 with the lack of semiconductors in the automotive industry and was strongly reinforced by the Russian invasion of Ukraine, as AD Plastik had significant production and sales in Russia. For Arena Hospitality Group, the decline could not really be attributed to business results, as 9M 2022 was the period of best results in the Company’s history, but more due to lack of liquidity and buyers for the Company’s stocks. Atlantic Grupa is somewhat of a mixed bag. Even though the Company recorded okayish results in 2022, it is strongly under the influence of inflation and expenses growth, leading to deteriorating profitability. Considering it is one of the largest and most liquid companies in Croatia, this negative sentiment was reflected in the Company’s stock returns.

In general, however, 2022 was a quite negative year for capital markets. Croatia was not spared this effect, and if we took the inflation rate into account as well (+13.5% YoY in November 2022), the real losses would creep up above 15% (including dividends). Still, combining low returns and low liquidity, it’s hard to expect that the situation will improve on its own. If we also include some one-off events that happened by the end of the year, such as the extra profit tax (of which you can read more here), it isn’t hard to see why Croatia seems quite unattractive to investors, both domestic and foreign.

However, to end on a positive note. The Croatian entry into the Eurozone and Schengen will mean that the currency risk will be eliminated, which will make investing in Croatia easier. At the same time, Croatian tourism (app. 20% of GDP) will also benefit, which will indirectly benefit the tourism industry stocks. Also, the largest drivers of inflation thus far, the oil&gas prices, have stabilized over the last couple of weeks, even to levels last seen before the war in Ukraine. As such, the inflation rates might also stabilize, and thus the interest rate hikes by ECB might end up being softer than expected. All of these factors are something that will only show their full effect now in 2023, so it will be quite interesting to see how the overall situation develops.