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CAPITAL MARKET

SAX falls to all-time low due to VSŽ's continued losses

Market developments
The market did not see any turnaround during the last two weeks, but instead saw the SAX index fall to an all-time low of 136.1 on March 12. Continued political uncertainty coupled with pessimistic expectations for 1998 corporate earnings are taking their toll. The SAX was pulled down by heavy losses in VSŽ stock, which at one point traded below 400 Sk per share. On the other hand, Slovnaft and Slovakofarma, with their strong fundamentals and credible management, showed resistance to the market downturn. These stocks should be recommended to portfolio investors, since both are undervalued and their long-term potential is not priced in yet.
The Slovak Statistical Office announced that real 1997 GDP growth was 6.5 percent, while most previous estimates had been for 6.0 percent. The figure shows that economic expansion is robust in spite of the NBS's tight monetary policy.

Market developments

The market did not see any turnaround during the last two weeks, but instead saw the SAX index fall to an all-time low of 136.1 on March 12. Continued political uncertainty coupled with pessimistic expectations for 1998 corporate earnings are taking their toll. The SAX was pulled down by heavy losses in VSŽ stock, which at one point traded below 400 Sk per share. On the other hand, Slovnaft and Slovakofarma, with their strong fundamentals and credible management, showed resistance to the market downturn. These stocks should be recommended to portfolio investors, since both are undervalued and their long-term potential is not priced in yet.

The Slovak Statistical Office announced that real 1997 GDP growth was 6.5 percent, while most previous estimates had been for 6.0 percent. The figure shows that economic expansion is robust in spite of the NBS's tight monetary policy. Unfortunately, this growth is not contributing to higher corporate earnings of listed companies, which is one of the reasons for the stock market decline. The primary reason for this is a lack of incentives for company managements to create shareholders' value via significant corporate restructuring since the market doesn't impose sufficient discipline on managements. We believe that the issue of corporate governance is one of the key problems of this economy.

Corporate developments

According to preliminary results, Slovenská Poisťovňa (SP) made a 1997 net profit of 310 million Sk, 9 percent lower than in 1996. The company collected insurance premiums worth 10.5 billion (8.9 percent more than in 1996), of which 7.5 billion came from non-life and 2.9 billion from life insurance, implying that the SP has a 62-percent market share. Disbursed compensations totaled 7.7 billion Sk, a 24.3 percent increase over 1996. SP President Edita Bukovská confirmed that the SP is interested in becoming a strategic investor in Investičná a Rozvojová Banka (IRB).

However, at the March 18 EGM, the principal shareholders of this troubled bank rejected the NBS proposal to sell an unspecified stake in the IRB to a banking entity, most likely the SP. The investor was required to commit to increasing the bank's equity by 2.5 billion Sk by the end of this year, with a further 3.3 billion equity increase planned for 1999. The NBS doesn't have the legal right to enforce its proposal. The bank's caretaker administrator, Dušan Krkoška informed shareholders that according to preliminary results the bank had sustained a loss of 3.06 billion Sk in 1997, much higher than our already pessimistic 1997 prediction. The loss completely wiped out all shareholders' funds, which totalled 1.9 billion Sk at the beginning of 1997.

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