Last Year’s Pariah Turns Into One of 2019’s Best Stock Markets

(Bloomberg) -- A year ago this day, Romanian stocks were plummeting amid prospects of a “greed tax.” Fast-forward to today, the levy is set to be scrapped, and the market is on track to become one of 2019’s top equity performers globally.

Optimism about a new, market-friendly government at the helm has helped the country’s stocks turn from pariah to darling, with the benchmark BET Index up 34% this year. That’s the third-best performance among 94 markets tracked by Bloomberg.

Shares in the European Union’s second-poorest nation are benefiting from improving earnings, fast economic growth, and still-cheap valuations after the index hit a two-year low in January. Also boosting the market is an impending FTSE Russell upgrade from frontier to secondary emerging market. That has triggered fresh inflows as well as speculation that MSCI Inc. may follow suit.

Romania’s Prime Minister Ludovic Orban, whose minority administration took over last month, has pledged to scrap some of his predecessor’s controversial policies, including a so-called “greed tax” on banks. His government also wants to raise money by floating power generator Hidroelectrica SA and other state-run businesses.

“Several state-owned companies could go public, and we encourage the government to use the stock exchange to its full potential,” said Adrian Tanase, chief executive officer of the Bucharest Stock Exchange. “The listing of Hidroelectrica could be decisive for the MSCI upgrade and it will generate a domino effect for the liquidity of other important companies.”

To be sure, local and parliamentary elections in 2020 might pose risks for the local stock market once more next year, said Alexandru Ilisie, investment director at OTP Asset Management in Bucharest. And for MSCI to follow FTSE’s steps and consider an upgrade to emerging markets, trading volume would have to improve from the current levels, according to Hasnain Malik, head of equity strategy at Tellimer in Dubai.

Read more on what investors and analysts see for this market in 2020:

Alexandru Ilisie, OTP Asset Management

• Upgrade of Kuwait to MSCI Emerging Markets Index next year should trigger inflows to Romania, as its share within the frontier index will potentially rise to 11.8% from 8.5%
• Says among Romanian names luring flows are Banca Transilvania, OMV Petrom, Romgaz, BRD, Transgaz and Electrica

Attila Gyurcsik, Accorde Fund

• Expects new government to introduce market-friendly measures, “investors foresee privatization to gain new momentum”
• “If the current setup can prompt early elections instead of the Nov. 2020 date, and ensure a full 4-year term, start reforms, consolidate the budget while boosting growth by promoting investments instead of consumption, that would be welcomed by markets.”
• Says there are “candies” lying around in the market, such as Societatea Nationala Nuclearelectrica (SNN), a nuclear power plant featuring 1,400 megawatt-capacity Canadian reactors, which pays 11% dividend yield. “It’s hard to say this is expensive”
• Says that Purcari Winery is small, but with annual growth of 20%-25% and “still much legroom in Romania.”

Hasnain Malik, Tellimer

• “The key in 2020 will be whether a coherent majority coalition emerges from the parliamentary elections; one capable of correcting course on fiscal policy and fully deploying EU development funds”
• Says that stocks from main sectors including banks, oil and gas, utilities and investment funds are “still cheap”.
• Keeps Purcari Winery and MedLife among favorites within the small cap category
• “An MSCI upgrade is possible eventually, but liquidity levels would have to improve first and that may need the release of more free float to drive that”

Tim Umberger, East Capital Moscow

• “Market continues to trade at a very appealing 9x P/E and 8% dividend yield, and as such remains attractive going into 2020”
• “If the performance continues, it should be smaller names in consumer sector, such as MedLife or Purcari Wineries -- well run, growing, privately-owned enterprises that we believe could do well in 2020”
• “The sizes of the companies are growing, there are some large IPOs in the pipeline, and sooner or later market will fulfill MSCI criteria. We think, however, this is not likely a 2020 story.”

--With assistance from Filipe Pacheco and Krystof Chamonikolas.

To contact the reporters on this story: Veronika Gulyas in Budapest at vgulyas@bloomberg.net;Irina Vilcu in Bucharest at isavu@bloomberg.net

To contact the editors responsible for this story: Zoltan Simon at zsimon@bloomberg.net, Blaise Robinson, Namitha Jagadeesh

©2019 Bloomberg L.P.