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CAPITAL MARKETS

Market Analysis: Is the Slovak capital market working to a genuine revival?

The mood on the Slovak capital market has been showing signs of a possible revival since the beginning of the summer. The main Slovak share index, SAX, has recovered from all time low levels, remaining stable at 90 points. Such mild optimism on the market is based mainly on the following:
1. The Bratislava Stock Exchange introduced trading in NPF SR (National Property Fund of the Slovak Republic) bonds at the end of July, which in the first entire month of their trading accounted for 22% of the total trading volume in August. The NPF SR, currently the most attractive security on the Slovak capital market, is expected to contribute to the development of genuine trading and a rise in trading volumes.
At present, some investors feel a slight degree of uncertainty compared to a couple of months ago, caused by the up-coming referendum on early parliamentary elections.


Pavel Habšuda

The mood on the Slovak capital market has been showing signs of a possible revival since the beginning of the summer. The main Slovak share index, SAX, has recovered from all time low levels, remaining stable at 90 points. Such mild optimism on the market is based mainly on the following:

1. The Bratislava Stock Exchange introduced trading in NPF SR (National Property Fund of the Slovak Republic) bonds at the end of July, which in the first entire month of their trading accounted for 22% of the total trading volume in August. The NPF SR, currently the most attractive security on the Slovak capital market, is expected to contribute to the development of genuine trading and a rise in trading volumes.

At present, some investors feel a slight degree of uncertainty compared to a couple of months ago, caused by the up-coming referendum on early parliamentary elections. Even though the Slovak capital market usually does not react significantly to political or economic developments, and despite the fact this referendum is only advisory (parliament does not have to approve early elections even if the referendum is successful) and is expected to fail, to some extent it has resulted in a cautious approach from investors. There has been a slight drop in the average bond trade price, the first since the end of May.

2. Some issues on the listed market have become attractive for investors, mostly issues of VÚB bank, the second largest commercial bank in Slovakia, and Nafta Gbely, the monopoly gas storage company. Even though the VÚB issue saw a price drop of 18% (since August 21), the price of 655 crowns (as of September 25) is well above the 350 crown level it sat on during 1H00. Nafta Gbely, with a current price of 1,449 crowns (as of September 25) has strengthened 121% since August 21, when it was 654 crowns.

The heavy trading of these issues on the direct market makes one suspect that a few people are trying to collect a large stake in the bank, likely leading to a consequent increase in participation from existing shareholders, or to other investors becoming shareholders with a considerable minority influence in these two attractive entities. Trading with IRB bank shares has also become heavier on the anonymous as well as direct markets, mostly in terms of concluded transactions, also indicating an attempt to collect a larger stake in the state-owned bank. Even though the possible interest of investors in collecting larger shareholding stakes in these entities might be a one-off, it may also to a certain extent trigger investment interest from smaller shareholders. BSE trading with these issues was also supported by issue undervaluation, better than-expected 1H00 earnings and pending privatisation of IRB and VÚB.

3. On September 20, parliament, in line with EU guidelines, approved a new Financial Market Bureau Law, forming an independent entity to supervise the capital and insurance markets. These types of institutions commonly supervise the running of capital markets in EU countries as well as in neighbouring Visegrad Four countries [Poland, Czech Republic and Hungary]. The Bureau will inherit its supervisory duties from the Ministry of Finance. It is expected that in two to three years the Bureau will take over the supervision of the banking sector from the National Bank of Slovakia.

The new body, independent and funded from the state budget, is supposed to begin operating at the end of the year. Members of the Bureau's executive bodies are to be selected on the basis of expert proficiency and not political orientation. The independence of the Bureau should be enforced through a complex process of replacement of Bureau body members by new governments after parliamentary elections.

The Bureau Board will consist of five members, with the five year term of each member expiring in a different year. Thus, a government will not be able to nominate all five board members with a single political orientation at once (and within one government's term not all five members will change office), preserving the Bureau's independence.

Pavel Habšuda is an analyst at Bratislava brokerage house Slávia Capital.
Comments and questions can be sent to him at phabsuda@slavia.sk

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