This article is part of Your Guide to Emerging Markets. All this week, we are focusing on emerging markets, sharing their potential pitfalls – and where you can make a pretty penny.
In 2017, Romania was the fastest-growing country in Europe, with its GDP increasing by 6.8% in real terms, the best rate of growth since 2008. While still a frontier market in most classifications, it’s currently teetering on emerging status, with predictions it will soon be upgraded.
Growth rates are expected to come down from 2018 onwards – Bank of America Merrill Lynch expects 3% for both 2018 and 2019 – but it’s still going to outpace many of its European counterparts.
The main driver of growth in Romania thus far has been the consumer sector, according to Johan Meyer, lead portfolio manager of the Romanian closed-end investment fund Fondul Proprietatea.
Meyer says Romania has seen a number of fiscal taxes have been abolished, while the VAT rate has been lowered from 23% to 19%. Combine that with low interest rates and the lowest unemployment rate in its history and consumers have more money in their pockets than ever before.
“You’ve seen this in the number of people in shopping centres, the number of new cars on the streets and the traffic congestion. It has been very rapid and very visible,” he explains.
Conversely, investment has lagged, with the country running an infrastructure deficit, and that is something that Meyer thinks needs to be fixed to balance out economic growth over the longer term.
But in terms of investing in Romania, it’s still one of the more exciting areas for many fund managers, especially those focused on emerging Europe.
It’s a relatively illiquid market: Matthias Siller, manager of Barings Emerging Europe (BEE) notes that Istanbul has a higher turnover in one day’s trading than Bucharest does in a year.
Siller believes that if frontier markets can be marketed better to global investors, fund flows will benefit. This would lead to a positive knock-on effect on the likes of Romania’s stock market.
While it’s come off around 7% since peaking just shy of 9,000 in April, the Bucharest stock exchange has performed well. It’s still up 55% in the past five years. It rose 9.5% in 2017 alone.
Stock Exchange Needs New Listings
The main area of investment for Fondul Proprietatea, which was launched in 2005 to compensate citizens whose assets were confiscated under communism, is the energy sector. Its top two investments are hydropower company Hidroelectrica and oil giant OMV Petrom.
There are, though, plenty of ways to play the consumer growth theme. One of these is MedLife, a private healthcare provider. “As individual wealth increases, people tend to opt for private healthcare services,” says Meyer.
Meyer says his fund, which has almost three-quarters of its net asset value invested in unlisted equities including state-owned enterprises, is currently trying to convince many of the larger firms to list on the public market.
“Ultimately, the stock exchange needs new large companies to come to the market on a more regular basis in order to really promote it and continue to attract investor interest into the market,” he says.
Another reason for the Government to partially list some of its larger companies is the possibility of raising cash that could be put towards other investment projects, including tackling down the infrastructure deficit.
Hidraelectrica, which accounts for around 40% of Fondul Proprietatea’s NAV, would be a particularly important flotation.
Meyer says it is “a very sizeable company and could potentially be the one that could let the Romanian market meet all MSCI requirements” for emerging market status. Should it list, it would be the first Romanian IPO since 2014.
There are issues that need tackling, though. Meyer says there have been a number of proposed legislative changes that may make the Romanian market less attractive for investors.
“From my point of view, the message that we need to put out there is that a stable and predictable regulatory framework is critical for fostering and promoting investor interest in Romania,” he says. “Otherwise investors will go elsewhere with their money and we don’t want to see that happen.”
