2010: Guide to the CEE Stock Exchange Group and its Capital Markets

Transcription

1 2010: Guide to the CEE Stock Exchange Group and its Capital Markets VIENNA, AUSTRIA BUDAPEST, HUNGARY LJUBLJANA, SLOVENIA PRAGUE, CZECH REPUBLIC

2 2010 GUIDE TO CEESEG AND ITS CAPITAL MARKETS A Letter to Our Readers Every day brings new evidence that the world s trading of stocks, bonds and derivatives, once an essentially local business, is becoming an increasingly integrated, globalized market. Cross-border trading proposals are many, but from Vienna comes an outstanding example of creating a multicountry regional exchange partnership that is up and running and already bringing benefits to its four national participants. The new CEE Stock Exchange Group (CEESEG AG), inaugurated early this year, unites the Austrian, Hungarian, Slovenian and Czech markets and gives investors easier access to these key countries. The idea for such a union emerged nearly a decade ago, and it took shape between 2004 and 2008 as the Vienna Stock Exchange acquired majority stakes in neighboring exchanges in Budapest, Ljubljana and Prague. This initiative was a natural evolution of Vienna s traditional role as the gateway to Central European business and finance. This Guide explains how this new partnership operates so that each exchange still has local autonomy, while partnering to give international investors a larger target market overall, with a common trading system. Investors who are not yet familiar with CEESEG would do well to take note. At the end of June 2010, the combined market cap of the 260 companies listed on the four bourses was almost 132 billion. This represents about half of the combined market cap of the entire CEE region. This was one of the first areas to begin recovering from the global financial crisis in 2009, but challenges lie ahead. This year, credit scares in southern Europe have affected investor confidence in virtually all smaller European markets. The CEE itself has not escaped criticism for high debt levels and budget deficits. The resulting austerity measures have fed uncertainty about market growth, and this has slowed the pace of new IPOs in the region. In this environment, the rationale for market consolidation becomes even more compelling for both investors and listed corporations. The purpose of this Guide is to give readers exclusive insights into the outlook for the region and for each of the four economies that are represented by CEESEG. Institutional Investor is pleased to join with CEESEG to bring global investors details of a groundbreaking experience that is likely to set the example for other regional markets around the world. Ernest S. McCrary Editor & Publisher Special Projects Institutional Investor Contents Chapter 1 Four Exchanges, Joint Forces...3 Chapter 2 The CEE Region: Recovery Is on the Horizon...5 Chapter 3 Austria: Still the Gateway to CEE s Growth Markets...6 Chapter 4 Slovenia: On the Road to Liquidity...8 Chapter 5 Czech Republic: A Star Performer Headed for a Comeback...10 Chapter 6 Hungary: A Head Start in Gaining Fiscal Balance...11 CEESEG at a Glance...12 Editor & Publisher Special Projects Ernest M. McCrary News Editor Special Projects Jan Alexander Art Director Special Projects Francis Klaess Writer Barbara Ottawa The information in this guide is intended only for use by financial professionals and is not meant to substitute for their own detailed knowledge of market conditions. An Institutional Investor Guide, published with the September 2010 issue of Institutional Investor. 2

3 Chapter 1 Four Exchanges, Joint Forces At the start of 2010, the Vienna Stock Exchange joined forces with its Central and Eastern European counterparts in Budapest, Ljubljana and Prague to form the largest securities market in the region under the newly formed holding company, CEE Stock Exchange Group (CEESEG AG). n CEE Stock Exchange Group Switzerland Germany Italy Czech Republic Austria Slovenia Croatia Bosnia and Herzegovina It has been a natural step for the Vienna Stock Exchange, or Wiener Börse, to look eastward for the past two decades. After the fall of the iron curtain in the early 1990s, Austrian companies were among the first in the world to rebuild ties with Eastern Europe. Today, the vast majority of companies listed on the exchange have operations in the Central and Eastern European (CEE) region. The idea of a regional grouping of stock exchanges had been under discussion throughout much of the past decade. The financial markets of the CEE region had excellent growth potential but were struggling to stay afloat because of their small transaction volumes. A network of CEE stock markets was seen as a way to ensure that each stock exchange kept its national identity while at the same time becoming more accessible for foreign investors and traders and increasing their international visibility, thereby Poland Slovakia Hungary Serbia Romania obtaining higher liquidity. In 2004, the Vienna Stock Exchange made its first step toward realizing the vision of unified exchanges with the acquisition of a minority stake in the Budapest Stock Exchange, a holding it later increased to 50.4 percent (68.8 percent together with partner Oesterreichische Kontrollbank). We have seen growing demand from investors ever since we purchased a stake in the Budapest Stock Exchange, says Michael Buhl, co-ceo of the Vienna Stock Exchange and a member of the management board of CEESEG. In June 2008, the bourse bought an 81 percent stake in the Ljubljana Stock Exchange in Slovenia and in November 2008 a 92.7 percent share in the Prague Stock Exchange. The idea was always a partnership between equals, with each stock exchange continuing to conduct its domestic business on its own while seeking to expand its international investor base through the partnership. Agreements among the four stock exchanges made it possible to create two indices of their stocks. The CEETX is the Group s tradable index and tracks the price trends of the 25 most actively traded and highly capitalized stocks. The CEESEG Composite Index serves as a benchmark for investors, as it is composed of the constituents of the leading share indices of the members of CEESEG i.e. the stocks included in the Austrian ATX, the Budapest BUX, the Prague PX and the Slovene blue-chip SBITOP. This index represents the development of the capital markets of the whole Group, CEESEG pointed out in its first joint report for Then on January 14, 2010, the stock exchanges of Budapest, Ljubljana, Prague and Vienna became equal subsidiaries of the holding company CEESEG AG. The holding company is responsible for the strategic and financial management as well as the administration of the four member exchanges. 3

4 2010 GUIDE TO CEESEG AND ITS CAPITAL MARKETS It is difficult for smaller stock exchanges to keep up on an international level therefore we have joined forces, says Heinrich Schaller, who shares the CEO post at the Vienna Stock Exchange with Michael Buhl and is also a CEESEG board member. Each of the CEESEG member exchanges is indeed small on its own. Vienna s market cap at 30 June 2010 was 73.4 billion. Prague s was the next largest, at 31.6 billion, while Budapest came in at 19.4 billion and Ljubljana at 7.5 billion. But together the four stock exchanges currently form the largest player in the CEE region, with a market capitalization of almost 132 billion. In the first half of this year, the CEESEG member stock exchanges accounted for 61.4 percent of all equity turnover in the region. At the end of the first half of 2010, a total of 229 vendors were distributing data provided by the Group on 260 listed companies, with 179 banks and brokers trading on all four stock exchanges. We are currrently focusing on the implementation of a unified trading platform, says Buhl. Our cooperation will not only save costs but also help boost trading volumes and market liquidity. It is not to say that the head of the respective stock exchanges did not find that some investors were skeptical about the benefits of the new system. We had to work maybe a bit harder than expected to explain the positive effects, says Schaller. But for us it is important to keep a good working relationship with all participants in each market, because they are the pillars of a stock exchange. Initial concerns were that it would be hard to get national Our cooperation will boost trading volumes and market liquidity. Michael Buhl 4 stock exchanges to agree to procedures on connecting with one another, that unifying the trading systems would be costly, or that investors might lose money through currency valuations. Yet Vienna had something of a precedent to show that cross-border connections It is difficult for smaller exchanges to keep up on an international level. Therefore we have joined forces. Heinrich Schaller would bring in more trading volume to make up for the initial costs. In 1999 the Vienna Stock Exchange introduced the automated international trading system Xetra, which Deutsche Börse created for the Frankfurt Stock Exchange in November Xetra has proven that it can open up local markets to increased investment, and is also in use in Ireland, Bulgaria and Shanghai as well as on the European Energy Exchange. According to Schaller, at first some trading members thought their market share would be diminished. But then they realized that the cake to be shared would become much bigger, he adds. Schaller says the development in Austria is a role model for other small stock exchanges. The introduction of Xetra is of course no automatic guarantee for attracting more investors, but it is a big step, he points out. Before the introduction of Xetra we did not have any remote members on the Vienna Stock Exchange. Today they account for over 50 out of more than 90 members. International remote members account for almost two-thirds of the trading volume on the Vienna Stock Exchange. Currently, the stock exchange in Ljubljana has one remote member. Budapest has seven, and Prague has none. The low numbers can be explained partly by the fact that many international brokers have opened local branches, so they are counted as domestic members of the stock exchanges. The hope is that new investors will discover the ability to trade Slovene, Hungarian and Czech stocks either through their Austrian operations or directly through Xetra. The Ljubljana Stock Exchange plans to adopt Xetra this autumn, making it the first of the other CEESEG subsidiaries after Vienna to do so. Prague and Budapest are scheduled to adopt it in Later the CEESEG members will start a joint clearing process and encourage cross-trading activities; the introduction of Xetra will facilitate trading other CEESEG members stocks. Slowly the demand from regional market players is increasing, says Buhl. We just recently admitted a second Romanian broker to direct trading on the Vienna Stock Exchange, for example. Schaller s and Buhl s long-term vision is to eventually harmonize all clearing and settlement proceedings within CEESEG as well as automatic cross-membership on all partner exchanges. But for the moment, the new entity is turning its sights to a joint marketing campaign, international road shows with all members, and a joint data dissemination channel for investors, all designed to increase the visibility of the region s markets. n

5 Chapter 2 The CEE Region: Recovery Is on the Horizon Reports of the CEE region s economic decline were exaggerated. Today the consensus is that Central and Eastern Europe are back on a growth path above the EU average. The upbeat mood in the region today is very different from the gloom of a year ago, when investment in CEE was deemed a highly risky venture and stock markets plummeted. It was difficult to convince people that calculations on the possible insolvency of the whole region were wrong, says Fritz Mostböck, head of research at Erste Group. In the meantime the markets suffered a downturn 1.3 that was completely exaggerated. He recalls a difficult time in which CEE investors struggled to prove their markets were stable, and eventually succeeded. Those markets where the fear was the greatest back in early 2009 and which suffered the most saw a much more pronounced recovery later in the year, says Andreas Schiller, an equity analyst at Raiffeisen Zentralbank (RZB). The CEE was among the first parts of the world to show positive growth on the capital markets. In some cases these recoveries in 2009 meant that the stock exchange indices skyrocketed 50 to 70 percent. While the picture varies greatly from country to country, in the first year after the crisis the positive growth stemmed mostly from the international aid boosting markets as well as the fact that fundamentals such as state deficits were not getting larger and in some cases were in better shape than those of the West. As the main force boosting the economies was public spending, including money from International Monetary Fund (IMF) and European Bank for Reconstruction and Development (EBRD) funds, the construction sector was a major engine in driving the stock markets up. Schiller at RZB believes that other industries have plenty of opportunity to benefit as these emerging economies begin to grow again. Our outlook for the stock exchanges in the whole region, including CEE, the Commonwealth of Independent States (CIS) and South-Eastern Europe (SEE), is positive, as the upward trend has already started, he says. We see a cyclical recovery throughout the year; after that there might be market corrections but over the long-term our outlook remains positive as the CEE region still has a lot of catching up to do regarding economic development. According to figures published by the Federation of Austrian Industry (IV) the average GDP in the new GDP Growth Forecasts (annual %) n 2010 n Austria Hungary Slovenia Czech Rep EU Avg* Source: Eurostat *27 countries EU member states is still only about half that of the old member states, and the convergence process will take another 40 to 50 years. There is still a lot of growth potential in the infrastructure sector, as well as in banking or financial products, says Mostböck. And the average income level is also considerably lower. His team estimates GDP growth for the eurozone at 0.7 percent for 2010 and about 1.4 percent for The CEE-6 Poland, Hungary, Czech Republic, Slovakia, Romania and Croatia on the other hand, are expected to grow 1.2 percent this year and 2.7 percent next year, according to forecasts from Erste Group. Raiffeisen estimates growth for the eurozone at 1.4 percent for 2010 and 1.5 percent next year, while the CEE region will grow 2.7 percent in 2010 and 3.2 percent in The broad consensus is that the CEE will not have huge government deficits. People talk about Greece, Portugal and Spain, but they are much less worried about Poland, Slovakia, the Czech Republic or Russia, says Stefan Maxian from Raiffeisen Centrobank (RCB). Other analysts agree that there is no need to worry. Apart from Hungary, all CEE countries have kept their public debt below 60 percent of GDP in 2009, according to estimates by Erste Group. Even for Hungary the outlook is not bleak, as its public debt is estimated at about 80 percent of GDP. That is exactly the eurozone level, a recent Erste Group study observes

6 2010 GUIDE TO CEESEG AND ITS CAPITAL MARKETS Similarly, the estimates for 2010 fiscal deficits in the CEE-6 countries, ranging from 3.5 percent to 6.3 percent of GDP, are below that of the eurozone at 6.9 percent of GDP. Only Slovenia is slightly above that figure, with an estimate of 7 percent. Part of the reason for their budget discipline has to do with pressure from the EU. Many CEE countries had been very focused on their national budgets even before the crisis because they had only recently joined the euro or are planning to do so, says Charlie Gushee, managing director of sales, global equity, at New York-based brokers Auerbach Grayson & Co. However, institutional investors remain cautious. Investors are in general still underexposed, says Gushee. But there clearly is an appetite to add exposure to emerging and frontier markets, and we see pickup across the board. Risk appetite has returned and investors are looking for growth in markets which they will not find in developed regions, says Mostböck. He points out that many European states depend on the financial sector for their economic growth, which remains battered by the crisis. CEE countries retain the lower wage advantage, which means Western European companies car manufacturers, for example will keep their production lines in these countries. According to Schiller, valuations remain cheap, with price-to-earnings ratios expected to average around 12.3 for 2010 and 10.6 for 2011 (ex-russia). Poland and the Czech Republic will have the highest P/E ratios, at 13.1 and 11.7 in 2010, respectively, and 11.4 and 10.3 in However, not all markets in the CEE region offer similar potential. Analysts are warning investors not to see the region as a homogenous bloc but as a collection of markets with quite different opportunities. Economic growth will remain weak in Hungary, says Maxian. Croatia and Bulgaria will be less dynamic. But Russia and Poland, which was the only country in the region to achieve positive growth Risk appetite has returned and investors are looking for growth in markets. Fritz Mostböck last year will see stronger growth. The time of pure screening for a growth story is over anyway, notes Gushee. Two years ago Greece was just a euromember with higher growth, he says. And then big holes in that story emerged. Investors are now looking at countries case by case, returning to bottom up stock-picking combined with a macro-specific analysis and that will benefit the CEE region. The underlying consumer demand and the fundamentals are good, says Gushee. Investors will look at countries in the region as a conservative emerging markets bet, with lower political risk but also lower growth potential than other emerging markets. This is not to say there won t be a stronger growth picture a few years down the road. Once economic indicators are picking up and the upward trend has stabilized, CEE will become a self-seller once again, says Schiller. n Chapter 3 Austria: Still the Gateway To CEE s Growth Markets Looking back 150 years, the Austrian economy was tightly interwoven with the CEE region. That is where it is heading again. companies went into the CEE region to stay, and they did not pull out during the crisis, Austrian says Christian Helmenstein, chief economist of the Federation of Austrian Industry (IV). Stefan Maxian, an analyst at Raiffeisen Zentralbank, has tracked the activities of Austrian companies in the region and confirms that none have withdrawn their CEE commitments because of the market downturn. After this crisis of faith in the region, everything is back to business, he says. Helmenstein foresees what he calls a trend toward normalization ahead, and that will include expanded CEE exposure on the part of Austrian companies. Looking back 6

7 100 years, the Austrian economy was much more linked to today s CEE countries, he says. With privatizations starting in the region for budget consolidation, Austrian companies will use this chance to increase their CEE commitment. The trend will also benefit the Vienna Stock Exchange, because it will be the most likely place for listed companies to raise money for their expansion policies. As was the case before the crisis, a vast majority of all companies included in the ATX index are doing business in the CEE region. Some players not yet active in the market, including smaller businesses, might use market exits by other Fritz Mostböck Erste Group foreign players in Southern and Eastern Europe to get an exposure to the region, says Maxian. He believes other Austrian companies will use the consolidation and restructuring process following the financial crisis to increase their CEE exposure. Charlie Gushee, managing director of sales, global equity, at New York-based brokers Auerbach Grayson & Co., agrees. CEE is still the story for the Austrian economy because of its exposure and commitment, he says. From 2005 to 2007, the beneficial influence of strong CEE exposure helped Austria s GDP growth rate outperform the other EU member states by 0.6 percentage points on average. Even in 2008, the growth was 2 percent, compared with 0.6 percent for the eurozone. In 2009, Austria s growth was down 3.6 percent, but the drop was less dramatic than the EU average of -4.1 percent. Austrian investors are welcome in CEE. They have not pulled out during the crisis. Christian Helmenstein According to estimates by Erste Group, the Austrian GDP is expected to grow 1.2 percent in 2010 (as compared to the eurozone rate of 0.7 percent) but growth will rise slightly in 2011, at 1.6 percent compared to 1.4 percent for the eurozone average. We also believe that Austrian growth will be positive again over the next years because of its involvement in Eastern Europe, notes Maxian. Nevertheless, says Maxian, it is no longer enough for Austrian companies to put a CEE label on their investment story. Investors have begun to differentiate more between various markets in the region, taking a closer look at developments and promises. The times when CEE was a panacea for everything are over, Maxian points out. He does not see that trend as a bad thing. Whereas in the past investors often bought CEE exposure without close examination, largely for portfolio diversification, as they take a closer look at the region, they will find out that the fundamental data is strong including that of Austria. For example, according to figures by the European Commission and the IMF, the Austrian budget deficit for 2010 is expected to reach 5.4 percent, compared to 6.3 percent for the eurozone. The important Austrian trading partners in the East have proven their strength and will be able to achieve higher growth than the West over the coming years, says Martin Maier, managing director at the Allianz Invest KAG. And the reservoir of growth markets is not yet fully tapped, according to Helmenstein. As we have reached the limits of monetary and financial measures to increase productivity in Europe, he says, the EU will have to make use of integration as a means to strengthen its growth potential. That leaves South Eastern Europe, and it will be Austria, which will profit from the integration of Croatia, Serbia, Albania and the others. According to new figures released by the Federation of Austrian Industry (IV), joining the EU in 1995 has helped Austria increase its GDP growth rate by 0.6 percent annually, decrease the unemployment rate by 0.4 percentage points and create more than 12,000 jobs. And, notes Helmenstein, with a further integration of markets to which Austria has had close links over the past decades, these effects will be reinforced. Christian Helmenstein Federation of Austrian Industry There is already a network of Austrian companies working in the region, and a mutual trust has been built, says Maxian. Austrian investors are welcome because they have not pulled out of the markets during the crisis, confirms Helmenstein. This year has seen the Austrian leading index, ATX, enter into a more or or less sideways movement, like many other international stock exchange indices. In early 2010, however, the ATX continued a rally that began in March 2009, fueled by the expansion activities of Austrian companies and a return of international investors. By the end of last year, the index had gained percent compared to twelve months earlier. The growth was mainly supported by value investors that accounted for large inflows in But also, institutional investors with a CEE focus increased their positions slightly. Moreover, Austrian investors institutional as well as retail customers enlarged their positions when prices were low. 7

8 2010 GUIDE TO CEESEG AND ITS CAPITAL MARKETS Institutional investors still have some catching up to do when it comes to investing or reinvesting in Austria and the CEE markets because they are often more cautious than retail investors, says Fritz Mostböck at Erste Group. But there already is evidence of institutionals returning. While some investors might remain cautious to the region s mid-term economic performance, Helmenstein stresses that the long-term perspectives remain intact. One sector that has been attracting a lot of interest is the Austrian banking sector. We have seen explosive rallies in Erste Group and Raiffeisen International, says Gushee. The latter may have lost out a bit because the rationale behind the corporate move is to integrate the listed CEE operations. Raiffeisen International becoming Raiffeisen Bank International was not fully understood by investors. It soon became clear, however, that the merger had a much more positive impact on Raiffeisen Bank International s earnings per share than expected. This move is not a lessening of the banking group s commitment to CEE but Raiffeisen using the success of its Eastern European operations as an advantage for the Austrian operations, says Helmenstein. One trend that might divert interest from Austrian stocks is international investors getting more market specific when it comes to CEE, rather than use Austria to get an overall exposure to the region. There is less of a rationale to put a premium valuation on Austrian stocks, says Gushee. Generally speaking, if it is easy investors will go directly into the CEE and CIS markets in the long run. But Helmenstein is not worried as it will still be Austrian subsidiaries in those markets that will profit from this trend. Helmenstein also sees Austrian real estate investments in the region in an optimistic light. Many banks had to write off their investments in US property debt, but investments in Eastern European real estate exist physically and can be sold or rented out, he says. While there was some downward correction in the return expectations on CEE property, the market has not collapsed. Mostböck believes Austria will profit from the growth in Central and Eastern Europe, but somewhat less than before the crisis. I do not even want to begin to imagine what it would be like if all Austrian companies were operating in Austria only, he says. We would be a much smaller market without much to offer in the way of growth. n Chapter 4 Slovenia: On the Road to Liquidity The financial crisis has left the Ljubljana Stock Exchange struggling to regain investors trust, but CEESEG membership and the status of being first in the new alliance to introduce Xetra will help boost interest in the market. In June 2008, the Vienna Stock Exchange bought a majority stake in the Ljubljana Stock Exchange (LJSE), after domestic owners decided it was the right step to increase international visibility and ease the exchange s illiquidity. The former domestic majority owners knew what LJSE needed, says Andrej Šketa, president of the management board at the LJSE. They see this as a step toward increasing visibility and liquidity of the Slovene market. He says there was plenty of discussion weighing the new opportunities against the transition costs, but the stockholders came to the conclusion that on their own they would not be able to approach as many international investors and gain access to so many new products. So there were no negative sentiments about the sale, says Šketa. The introduction of the Xetra trading system this fall Polona Peterle, Andrej Šketa, Ljubljana Stock Exchange will open a two-way door to internationalizing the Slovene market. The system will make it easier for international investors to enter the market. At the same time, Slovene traders will gain easier, standardized access to products from stock exchanges using the same system. The Slovene finance ministry supports the stock exchange in this effort to attract foreign investors and increase liquidity. The ministry says the new trading system will benefit all parties involved. We expect that the introduction of Xetra this year will improve trading volumes in our shares due to easier and more direct access to the Slovene capital market, says Brane Kastelec, director of finance at the Slovene pharmaceutical company Krka, which is one of the top picks in the region for New Yorkbased brokers Auerbach Grayson & Co. 8

9 He sees cooperation with other stock exchanges in the region under the CEESEG holding as a valuable opportunity to promote our company and increase the visibility of Krka shares among foreign investors. Krka happens to be one of the first success stories of the regional cooperation of stock exchanges. When the pharmaceutical company, which has a market cap of 2.5 billion, was included in the CETOP20 index in March this year, liquidity on the Ljubljana Stock Exchange was boosted for the first time in months, explains Šketa. The index includes 20 blue chip companies across CEE countries. It is a true collaboration between CEESEG members, as it is calculated by one of LJSE s partners within the Group, the Vienna Stock Exchange, and distributed by another CEESEG member, the Budapest Stock Exchange. Similarly, the energy company Petrol, one of the largest issuers on the LJSE, hopes that Xetra will contribute to an increase in the share of foreign investors. However, we believe that the decisions of investors, both domestic and foreign, are based particularly on the financial performance of the company, says Barbara Jama Živalič, head of investor relations at Petrol. The most important considerations, she says, are financial indicators and the share price, although it also helps if the company has easily accessible multi-language web pages and other information. The country is rapidly recovering from a steep decline last year. Approximately 60 percent of its GDP comes from exports, so Slovenia was hit hard by the drop in worldwide consumer demand. Among the four countries of CEESEG s member exchanges it was the one with the most pronounced decline in GDP, at -7.8 percent for But Šketa says the decline has to be seen in light of the fact that prior to the crisis the Slovene GDP had grown at up to 6 percent a year, well above most EU member states. This means the setback was not as bad, says Šketa. We only lost around 1.5 years. And the fundamentals remain strong. Slovenia joined the EU in 2004 and the euro in 2007, and We expect international investors to grow to 50 percent of trading volume. Andrej Šketa in 2009 it sported one of the lowest public debt levels, at 35.9 percent of GDP in 2009 compared with a eurozone average of 80 percent. Slovenia is a very small market, but it is a model student in the region, says Fritz Mostböck, head of research at Erste Group. Slovenia is a relatively conservative bet within the region but it has made serious advances in terms of development of its capital market, says Charlie Gushee, managing director of sales, global equity, at New York-based brokers Auerbach Grayson & Co. It does have a head start, but currently it is very much off the radar of clients because of liquidity issues. The LJSE s main index, SBI TOP, gained less than other stock markets in the region last year (15 percent) and dropped 10.4 percent in the first half of This was mainly driven by our present inability to get investors back, says Polona Peterle, Šketa s colleague at LJSE s management board. Around half of the turnover on the stock exchange used to come from domestic retail investors, and they are quite careful at the moment. But an amendment to the pension fund investment regulations could boost domestic interest in Slovene equities. A more dynamic asset management, which will also allow a higher exposure to equities, says Peterle, will mean a restructuring of pension fund portfolios from bonds-only to more diversified investments over the next years. Kastelec at Krka believes it might be helpful to extend the trading hours at the LJSE. That would simplify the clearing and settlement process, he says, and further increase the visibility of the market and issuers among investors to ensure more participation. Those concerns about clearing and settlement are, in fact, being addressed as part of the cooperation with other stock exchanges in the region through Franc Križanič CEESEG, which eventually might Minister of Finance, include a unified clearing and Republic of Slovenia settlement process. Already, the stock exchanges are presenting themselves at joint road shows to international investors. Šketa believes this cooperation within the scope of CEESEG will also attract more international traders and remote members. So far, the only foreign member at the LJSE is the Viennabased ecetra Central European e-finance, which joined last year. However, as in many other CEE countries, some of the LJSE members are subsidiaries of international banking groups or other traders, which are in effect international partners but joined the stock exchange as domestic members via their subsidiaries. There is a huge potential regarding the presence of international investors at the LJSE as they currently make up only 10 percent of the trading volume, says Šketa. But we expect this to grow to 50 percent, which is the average in the CEESEG markets. Šketa also believes that what could attract international interest are discussions by the Slovene government to raise capital by privatizing at least parts of some state-owned companies. Currently, he says, around 23 percent of companies are owned by the state, compared to a 5 percent average in the EU. We expect the level to shrink in Slovenia over the next five to 10 years. He says candidates for possible IPOs or part-privatizations include the largest banking group, Nova Ljubljanska banka (NLB); the Slovene post, power utility companies; and a possible increase of the free float in the second-largest bank Nova Kreditna banka or the local telecommunication provider. The finance ministry takes the position that while there are different views about the pace of privatization, it remains open to all constructive suggestions while seeking a broad political consensus. n 9

10 2010 GUIDE TO CEESEG AND ITS CAPITAL MARKETS Chapter 5 Czech Republic: A Star Performer Headed for a Comeback Trading on the Prague Stock Exchange (PSE) came to a near halt in the wake of the crisis, but strong fundamentals and a wave of new listings will boost the market in the years ahead. Like many markets around the world, the Prague Stock Exchange saw a dip in the first half of 2010, falling 1.2 percent, but that put only a slight dent in the 85 percent recovery that occurred in the second half of Current trading volumes are low, but the stock exchange index PX saw a major rally in 2009, says Jan Procházka, an analyst at the Czech brokerage firm Cyrrus. Market capitalization increased 5.6 percent last year, to 31.3 billion (excluding foreign listings), and another 1 percent in the first half of 2010, to 31.6 billion. Continued growth, however, will require stimulus from the government. Growth is slow, says Procházka. We need more initial public offerings (IPOs) and more retail investors, so the PSE has to intensify its already good marketing campaigns aimed at retail investors. There is one major IPO planned for this year or the next that will attract international attention. The Belgium-based financial group KBC will be floating parts of its Czech subsidiary bank Československá obchodní banka (ČSOB). The size of the listing could be between 1.3 billion and 3 billion. Even during the difficult year, as the PSE labels 2009, five companies increased their capital via the stock exchange and one implemented a secondary public offering (SPO) with the total capital raised amounting to 124 million. The biggest question now is what will happen with regards to the privatization of state holdings, Procházka points out. As possible candidates for privatization or partial privatization, he names the mail service Česká pošta, the grid operator ČEPS, the biofuel storage and handling company ČEPRO, the airline group ČSA, and the airport operator Letištĕ Praha. State-owned assets now amount to approximately 20 percent of the entire Czech corporate sector. Before the financial crisis, 10 plans were under study to sell off more of the remaining stateowned assets, but since then all efforts have been on hold. Bond activity has been exceptional since the financial crisis, however, largely because with bank loans difficult to access, many companies have turned to the capital markets. The volume of corporate bond issues was up 166 percent in Until June 2010, there was The Czech Republic has the highest expected EPS growth of the region. Andreas Schiller one more listing, increasing the total number of corporate bonds to 17 and the total issuing volume to 1.4 billion. In order to attract more investors and bring the clearing and settlement process up to modern standards, the PSE has purchased the Securities Register and included it in the newly opened Central Securities Depository Prague (CSD), which will operate the clearing and settlement system. In general, analysts believe that the country s economic fundamentals remain strong. The Czech Republic has the highest expected earnings-pershare (EPS) growth of the region with 47.5 percent for 2010, says Andreas Schiller, an equity analyst at Raiffeisen Zentralbank (RZB). Nevertheless, the P/E ratio of 12 is rather high. One of the reasons that the crisis hit the Czech Republic so hard although still less than many other countries is that the economy is very much led by foreign exports, especially in the car industry. The drop in exports brought real GDP down by 4.3 percent in But a combination of international efforts to boost demand for cars, including the scrapping premium in many countries, together with the Czech government s fiscal measures, allowed the economy to start growing again in early Looking at the structural integrity of the Czech Republic, Erste Group points out that the state is among the top five in the EU when it comes to low fiscal deficits. Estimates for 2010 are at -4 percent of GDP, well below the eurozone average of -6.9 percent. Procházka also hopes that the cooperation with other stock exchanges in the region under the CEESEG holding will increase international trading on the PSE. Globalization is happening in all areas, and capital markets cannot remain standing alone in a corner, he says. Large investors are present everywhere in the world, but also retail investors are asking for access to other markets. n

11 Chapter 6 Hungary: A Head Start in Gaining Fiscal Balance First in, first out might be the motto for the Hungarian economy. This market had to introduce strict fiscal measures before any other European nation. was the first significant nation that had a government debt crisis two years ago, says Charlie Hungary Gushee, managing director of sales in the global equity division of Auerbach Grayson & Co. So the dirty laundry got aired, and they implemented strict fiscal policies. Government austerity measures, combined with the conditions under which the country was granted financial aid from the IMF and the EU in 2008, meant that it could not ease the fiscal policies and was hit particularly hard by the crisis. In 2009, the Hungarian economy declined 6.3 percent. Yet, overall the country managed to decrease its fiscal deficit by more than half, down to 3 percent from 2007 to 2009, while most European countries saw their deficits increase. The CEE-6 countries (Poland, Hungary, Croatia, Romania, Slovakia and the Czech Republic) started their homework earlier, and Hungary is the most successful frontrunner in fiscal consolidation, says a study from Erste Group. But the road to fiscal consolidation has been rocky, as indicated by the halting IMF talks on a rescue package. Measures already introduced include a value-added tax (VAT) increase; changes to the pension system; and cuts in public transport, local councils, energy subsidies and employer social contributions. The new conservative government that took office after general elections in April plans to introduce a radical flat income tax of 16 percent starting next year, replacing the current 32 percent for annual salaries over $21,500 and 17 percent for those below this threshold, which are by far the bulk of Hungarian earners. Another controversial measure is a tax subjecting banks to a 0.5 percent levy on assets from the end of All of these measures are aimed at keeping the fiscal deficit below 3.8 percent for 2010 and 3 percent for 2011, but the IMF is asking for more structural changes rather than limited measures such as the bank tax, which will be abolished sometime after Andreas Schiller at Raiffeisen Zentralbank (RZB) expects to see a stagnant GDP this year, which is an improvement over the decline of the previous year. And the stock market has recovered since the crisis. Last year, the BUX index increased 73.4 percent after it had dropped some 50 percent in The market capitalization grew from 13.2 billion to 20.9 billion but remained well below the 2007 level of 31.5 billion. Even in the first half of 2010, when almost all international marketplaces declined, the Budapest Stock Exchange eased just slightly. An important concern, however, is that the stock market needs a more diversified mix. Many companies became foreign-owned in the rapid privatization policies of the 1990s. With 46 companies on the exchange compared to more than 100 in Vienna Budapest s stock market moves mostly with its four largest blue-chip companies: the banking group OPT, the country s largest oil producer MOL, the pharmaceutical maker Gedeon Richter and Magyar Telecom. According to Schiller, earnings per share of Hungarian companies are expected to rise 6.8 percent this year and around 27 percent next year. However, MOL, with an expected 44 percent profit growth this year, is almost single-handedly responsible for the bright forecast. Retail investors have been a major force in the recovery. Being more flexible than institutional investors, they saw the market crash as a chance to buy stocks at bargain prices. Before the crisis, retail investors accounted for only 20 percent of all investments on the Budapest Stock Exchange. Now they hold more than 30 percent. Last year s performance was an impressive rally, and both retail activity and participation increased rapidly, says Péter Császár, an analyst at KBC Securities in Budapest. In particular, retail clients were very active. They came into the market because of the low prices, but after the rally they might withdraw their money and invest in real estate or take it to the bank. One great hope is that a new listing planned for 2011 will attract new investors. The IPO by the K&H Bank, a subsidiary of KBC and the second-biggest bank after OTP, will attract a lot of attention from clients, says Császár. It s a good opportunity to diversify the banking sector, as so far OTP is the only major listed bank. So all in all there is some short-term risk in the market but the long term outlook is positive. Once the international equity markets have stabilized again, Hungary should also be out of the woods, says Schiller. n 11

12 CEESEG at a Glance Leading index...atx Performance 30 June June 2010* % Market capitalization** bn Number of listed companies** Number of trading members*...94 Website... Contact...info@wienerborse.at Leading index...sbi TOP Performance 30 June June 2010* % Market capitalization** bn Number of listed companies**...76 Number of trading members*...23 Website... Contact...info@ljse.si Leading index...bux Performance 30 June June 2010* % Market capitalization** bn Number of listed companies**...46 Number of trading members*...40 Website... Contact...info@bse.hu Leading index... PX Performance 30 June June 2010* % Market capitalization** bn Number of listed companies**...26 Number of trading members*...22 Website... Contact...info@pse.cz All data as of 30 June 2010 Source: *Wiener Börse AG, **FESE One Data Feed, Seven Markets Through the data feed ADH of the Vienna Stock Exchange, the CEE Stock Exchange Group provides price data with market depth on CEESEG s regional financial markets: Budapest Ljubljana Prague Vienna, as well as other cooperating stock exchanges: Bucharest Banja Luka (Bosnia and Herzegovina) Sarajevo (Bosnia and Herzegovina), and three energy exchanges: Energy Exchange Austria CEGH Gas Exchange of the Vienna Stock Exchange Power Exchange Central Europe in Prague (to be included shortly) Global Experts for CEE Indices The members of the CEE Stock Exchange Group have joined the forces of all partners and now market and sell index licenses from one source worldwide. Together, the Group members calculate more than 55 indices that track national, regional, and sector developments in CEE and in the CIS (Commonwealth of Independent States) countries. The indices are used worldwide by some 90 international licensees as underlyings for certificates, warrants, exchange-traded funds and other structured products. CEESEG has already launched two Group indices the CEETX and the CEESEG Composite Index that comprise companies of the four attractive markets of its member stock exchanges.