Vol. 3 No.3  

Stock markets: it’s a battlefield

Charting the effects of the 5 March correction on the global capital markets, Stere Farmache, general manager of the Bucharest Stock Exchange, offers some Chinese wisdom

Previous articles:
* Renewable energy in an integrated south-east Europe energy market (Feb 07)
* Combating the risk and emergence of bird flu (Mar 07)

Stere Farmache     Monday 12 February 2007. End of the trading session at the London Stock Exchange.
     All brokers had their eyes filled with joy. The FTSE index had risen over 6,380 points, a record that had not been reached since 2000. But the thin line between agony and ecstasy is not that well defined in the world of capital markets.
     One month later, the eyes of the same brokers could hardly display the same degree of joy. The famous London index was decreasing at an alarming rate. In one single day, on 15 March, the FTSE 100 lost 380 points, similar to what it managed to gain from October 2006 to February 2007.
     During this time, the BET index of the Bucharest Stock Exchange (BSE) followed a similar path to that of the notorious indexes on the international markets. After 1 January, BSE quotations, also enlivined by the EU accession, were very close to foreign indexes. The BET index – which reflects the evolution of the most liquid shares listed on the Bucharest Stock Exchange, except those of the Financial Investments Companies (SIFs) – rose over 8,900 points on 15 February (the BET index was launched in 1997 at an initial value of 1,000 points). But in mid-March, the trading prices of the most important shares, lowered the index by almost 400 points.

“Trading indices on the BSE between 15 February
and 15 March 2007 were bigger than the same
period in the previous year,”

     The parallel behaviour of these developments contradicts the theories which place the Romanian stock market outside the international context. It is true that, since it re-started its activity in 1995, the Bucharest Stock Exchange  went through a phase in which it was completely disconnected from external influences. But in those days, liberalisation of the capital account was rather an abstract notion in Romania. Today, when foreign currency moves freely, almost half of stock exchange investments are made by foreign capital. The weight of foreign investors among those 70,000 accounts opened at brokerage companies has also acted as a protection shield for the market. At the same time, when western and Japanese indexes were decreasing by over 3.5 to three per cent, the BET depreciation stood at 1.5 to two per cent. But this fact could not protect the market from the ‘black day’ of Monday, 5 March, when the index dropped by five per cent. Still, half of this ‘loss’ was recouped the following day.

Contradictory movements

     With all the apparent contradictory evolutions of this market, the trading indices (volume, value and the daily average value) were, in the 15 February to 15 March time frame, bigger than the corresponding period of the previous year. They were even higher than last year’s average, and last year was considered a good year for the Bucharest Stock Exchange.
     One explanation for this is the fact that capital market investors are also closely looking at the currency market. The continuous strengthening of the local currency, the RON, has counterbalanced the recent decrease in quotations. This way, investors were not that much effected by the psychological pressures deriving from redirecting foreign capital influxes.
     Thus the decreases witnessed at the Bucharest Stock Exchange can also be attributed to the fact that both Romanian and foreign investors were focusing on avoiding losses on foreign markets through running massive capital transfers.
     Considered to be a somewhat natural correction, the rebound of quotations on the external markets was also caused by the alarming news about the evolution of the Chinese economy.
     China is home to teachings from a general and philosopher on the art of war, Sun Tzu, which are now part of the lexicon of the modern investment culture.
     ‘The one that occupies the battle field first will be rested, the one that gets there later will be exhausted,’ he states. ‘Skilled warriors make their enemies come to the battle field.’
     This seems to be the best tactics to apply at the Bucharest Stock Exchange nowadays. By keeping a keen eye on the market, investors get the chance to follow the evolution of listed shares and sell at maximum prices, then re-buy them at minimal prices.

The Diplomat/Wolf Theiss Experts Platform is a monthly essay written by an international or local expert on current topics of the day. The opinions expressed herein are not reflective of any opinions of The Diplomat and Wolf Theiss as to agreement/disagreement or otherwise.