INTERVIEW - Foreign Investors Bullish on Croatian Equities Along the Road to EU Entry

ZAGREB (Croatia), December 28 (SeeNews) - The equity market of European Union candidate Croatia has caught the eye of foreign investors who anticipate a surge in stock prices just like in Bulgaria and Romania, which join the bloc next week, a Bulgarian fund manager said.

INTERVIEW - Foreign Investors Bullish on Croatian Equities Along the Road to EU Entry

ZAGREB (Croatia), December 28 (SeeNews) - The equity market of European Union candidate Croatia has caught the eye of foreign investors who anticipate a surge in stock prices just like in Bulgaria and Romania, which join the bloc next week, a Bulgarian fund manager said.

Although Black Sea neighbors Bulgaria and Romania are much poorer than the ex-Yugoslav Adriatic nation, Croatia started accession talks with the European Union later than them, in October 2005, for political reasons, and is expected to join the EU by the end of the decade.

Vladislav Panev, president of Bulgarian fund management company Status Capital, said that Croatian shares are still cheap compared to those in Bulgaria and therefore offer additional upside potential. Status Capital is the first Bulgarian institutional investor to start business in Croatia. Funds from Austria are also investing in Croatia.

"The coming accession of Bulgaria and Romania to the European Union at the beginning of next year led to a robust rise in optimism among investors. For example, banks in Bulgaria trade at levels 5.5 to 6.0 times above their net asset value, while their peers in Croatia trade at 2.5 to 3.5 times, and at the same time the growth of the banking sector in Croatia is not lower than in Bulgaria.

"Industrial companies including pharmaceuticals also trade at much lower levels. I consider that valuations in Croatia can also reach similar levels of share prices after two to three years after prospects for country's membership to the EU get clearer," Panev said in a statement to SeeNews.

One of the reasons for the discount in Croatian shares is that Bulgarian and Romanian economic growth is much faster, he said. Bulgarian economic growth is expected to be above 6.0% in 2006, Romania's is seen at 7.0%, while Croatia's is planned at 4.6%.

However, some Croatian analysts have warned that share prices there are relatively expensive by valuations like price/earnings ratio as this summer the Croatian equity market hit its highest ever levels amid a takeover of blue chip drug maker Pliva, the country's prospects of joining the EU and strong corporate results of domestic companies. The recent initial public offering of 17% in oil and gas company INA as part of company's privatisation, and the coming IPO of a minority state-owned stake in telecoms T-HT and strong demand from the domestic fund industry are seen as some of the main drivers for the Croatian market next year.

CROATIA'S ADVANTAGES

But Panev is not put off: "We can say that the Croatian market is performing as the most stable in southeastern Europe. Contrary to Bulgaria and Romania, the free float in single shares is much higher. Besides, more Croatian companies can be considered to be working really well, with exports to tens of countries worldwide and relatively broad shareholders' structures. These things are not present in the other countries in the region," Panev added.

Due to the diversified shareholders' structure of companies on the Zagreb bourse, the market can control the management to a much greater extent. In Bulgaria, the management depends mostly on the main shareholder and in many cases they are one and the same person, he said.

So far, the Bulgarian financial regulator has allowed Bulgarian mutual funds to invest only in shares of the official 25-share Crobex index of the Zagreb bourse.

At the end of 2006 Status Capital has invested some 850,000 levs ($570,000/434,000 euro), or one fifth of the assets of its fund Status New Shares, in seven Croatian companies. "We find the the financial sector and industry attractive because they have relatively higher growth opportunities. Our strategy is not to focus too much on traditional Croatian sectors like tourism and the shipping sector," Panev said.

"Since the Croatian market is among the most mature in southeastern Europe, probably the value of our investments on the Croatian market will rank between 20 and 25% of the assets of that fund, which is our biggest portion invested on a bourse outside Bulgaria," he added. That means that if the fund's assets rise by 100% annually -- which is the trend of the fund industry in Bulgaria, its investments in Croatian shares will reach some 5.0 million euro after three years or 20 million euro
after five years.

BULGARIA'S ADVANTAGES

For a foreign investor in Croatia, the main potential problems are related to the different legislation, Panev said.

Following a lot of problems regarding decisions of majority shareholders that damaged interests of minority shareholders at the end of 1990s, legislation in Bulgaria has sharply improved in recent years regarding protection of minority shareholders and now similar cases are virtually impossible.

In Croatia, the legislation protecting small shareholders rights is less rigorous, possibly due to lack of negative experience. "However, that worries investors who come from countries with stronger regulation," Panev said. He believes that this will improve as Croatia's negotiations with the EU go ahead.

The other problem in Croatia is the lack of opportunity for foreign investors to directly place orders at the bourse, when working with a bank depositor, Panev added. That problem exists everywhere in the region except Bulgaria where for the last four years there exists an efficient system for distance trading. Some 70% of deals on the Bulgarian Stock Exchange are carried out between clients through the electronic trading system. That reduces significantly the costs of brokers as their role is reduced to confirming the placed orders.

Another advantage of Bulgaria is the currency board. "The Bulgarian national currency is pegged to the euro and the currency risk does not exist, which is very convenient for foreign investors," he said.

In Bulgaria there are many more IPOs of new and interesting privately-owned companies which seek financing on the bourse. "That makes the market very dynamic."

ROMANIA, SERBIA

As well as in Croatia and Bulgaria, Status New Shares invests also in Romania and Serbia.

Since late May, when the fund was set up, it return has been above 26% due to the good performance on the four markets in which Status New Equities has invested - Bulgaria, Croatia, Romania and Serbia, Panev said.

So far 10% of the assets of Status New Shares are invested in three Romanian companies.

The largest part of fund's assets there went to energy company Transelectrica as the privatisation of 10% of company's shares through the bourse was the most important issue on the Romanian market this year, Panev said. "The Romanian market is the most liquid one in the region and despite the fact that share prices of most companies in Romania are high, good investment opportunities still exist," he added.

Depending on market developments in Romania, the fund expects that the percentage of Romanian shares will reach 15% of its assets. In 2007, new IPOs and privatisation of shares through the bourse are expected, which most probably will attract its attention. Besides, Romania is the biggest country by population among all ex-communist countries in southeastern Europe. Although by market capitalisation Croatia is the biggest.

The fund has recently started investing in EU aspirant Serbia, which also offers a so-called convergence play ahead of membership of the union. The concept is based on assumptions that the economies of these countries will move in line with those of the EU members and prices of local assets will rise to the levels in the union. Currently Serbia's Stabilisation and Association talks with the EU are suspended over the country's failure to deliver key war crime suspects to the Hague-based U.N. war crimes tribunal.

"The main drivers of the share prices in these [four] markets will be economic growth supported by the integration into the EU. It is obvious that the integration itself will not lead to prosperity but the opening of markets and improvement in legislation should help companies which are globally competitive to rise at a fast pace," Panev said.

He expects a slowdown in the growth of share prices, which is normal given that 2006 was one in a row of several successful years for markets in that region. Nevertheless, overall growth in the range of 20 to 30% will be good for each of the countries, he said and believes that good diversification will protect the fund from any possible correction that every one of these markets could face.

"It's hard to give a forecast for the next year but we believe that the return will be similar (like this year). For us it is important to reach a good diversification of assets among the different countries to minimise the risk for our clients and at the same time to use all favourable opportunities like privatisation and IPO, which they offer."

As a young company, operating in an emerging market, Status Capital hopes that assets under its management will rise 100% annually or at the end of 2011 it will have 80 million euro assets under management.

"The achievement of a market share of 5.0% from the current some 2.0% in Bulgaria will be success for us," Panev said.

(1 euro=1.9555 Bulgarian lev)

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        Thu Dec 28, 2006 09:57 GMT