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CAPITAL MARKET REPORT

Low share prices could attract bargain hunters

1996 marked the most successful year for the Slovak capital markets. Total market turnover in 1996 was Sk136bn ($4.3bn), equity trading constituted Sk105.2bn ($3.34bn). This translates into a multiple of 1.53 to market capitalization of Sk68.9bn ($2.2bn).
During the first eight months of 1996, the markets boomed, gaining more than 47% since the beginning of the year. But then share prices declined due to the natural gas storage company Nafta Gbely's dubious privatization, weaker 1H96 corporate performance and devaluation expectations due to the trade deficit exceeding $1 bn in July. The market's decline accelerated in November, when Parliament approved a controversial amendment to the Securities Act, which would have enabled majority owners to withdraw shares from public trading. After Parliament reinstated the legislation to its original form, share prices and trading volume increased as institutional investors repriced their shares, and the mood turned optimistic.

1996 marked the most successful year for the Slovak capital markets. Total market turnover in 1996 was Sk136bn ($4.3bn), equity trading constituted Sk105.2bn ($3.34bn). This translates into a multiple of 1.53 to market capitalization of Sk68.9bn ($2.2bn).

During the first eight months of 1996, the markets boomed, gaining more than 47% since the beginning of the year. But then share prices declined due to the natural gas storage company Nafta Gbely's dubious privatization, weaker 1H96 corporate performance and devaluation expectations due to the trade deficit exceeding $1 bn in July. The market's decline accelerated in November, when Parliament approved a controversial amendment to the Securities Act, which would have enabled majority owners to withdraw shares from public trading. After Parliament reinstated the legislation to its original form, share prices and trading volume increased as institutional investors repriced their shares, and the mood turned optimistic.

Although the market reacted positively to the amendment's revision, other factors which caused the equity market to decline in recent months such as weak protection for minority shareholder's rights, an opaque privatization process and devaluation concerns still remain.

We do not expect any significant breakthrough of prices on the capital market in 1H97. However, low share prices could attract bargain hunters, especially with large Slovak exporters such as VSŽ and Slovnaft, which will cash in on the abolition of duty and quota restrictions on exports to the EU which became effective January 1, 1997.

The market's first trading session in 1997 resulted in a bearish attitude and very low trading volumes. VSŽ share prices rose to Sk620 because investors expect solid results in 1996 and continuing growth this year.

Shares of investment funds Harvard Growth Fund and Harvard Dividend Fund were delisted from public stock exchanges after their assets were transformed to new joint stock companies called Prvá Strategická and Druhá Strategická.

Slovenské Lodenice's EGM on December 23 approved a convertible bond issue worth Sk300 ($9.5m) and a standard bond issue worth Sk200m ($6.35m) after the company failed to increase its registered capital from Sk626.3m ($20.2m) to Sk800m ($25.8m) its EGM stipulated in May 1996.

Nafta Gbely launched a massive year-end media campaign to improve its battered image. The company was privatized under dubious conditions and its current owners are probably closely connected to the current political elite. We recommend caution with this company until its management provides proof of a fair attitude toward minority shareholders.

POSS ADDS

The BSE also introduced a new information system from Reuters which will be used to collect and distribute data about security issuers. The system will enable issuers to send information to the BSE and other customers on-line.

The funds thus have been transformed into regular j.s.c.s, meaning they no longer are subject to Ministry of Finance supervision, and their stakes in other companies are no longer limited to 10%. However, the new companies have taken advantage of the amendment to the Securities Act and their shares probably will not be publicly tradable. The Bratislava Stock Exchange [BSE] is planning to transfer some less liquid shares from the main market to the unlisted market and to introduce stricter criteria for listing issues.

Prepared by ING Bank N.V., Bratislava branch in cooperation with ING Baring Securities (Slovakia), o.c.p.,a.s.

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