Nadia Petrova, Analyst, ELANA Fund Management
By definition, liquidity on the stock market represents the ability to buy or sell an asset without causing a significant movement in its price and with a minimum loss of value. Liquidity is one of the main characteristics of an efficient market and is highly valued by investors. Unfortunately, the Bulgarian stock market still can’t fully comply with this definition. Though the market liquidity has noticeably improved in the past few years (see the table below), the Bulgarian market is still far behind the developed markets, and even lags behind most of its regional peers. Of more than 300 companies that are listed for trading on the Bulgarian Stock Exchange (BSE), only 50 to 60 are more actively traded. The free float of the public companies is still relatively small compared with peers from developed markets, which also dampens trading activity and makes accumulation of packages challenging.
Recently, liquidity was additionally pressured as the market correction of the BSE, which started in October 2007 following the global market turmoil, forced investors to pull out of their equity positions, although they usually prefer to stay aside the market, to wait for improved sentiment.
The management of the BSE itself recognises the liquidity problem and decided to make the enhancement of market liquidity one of its centre points of its development strategy for the period 2008/2010.
A key goal of the exchange is to encourage more companies to become public. In fact, the large number of IPOs (initial public offering) was among the main reasons to see market liquidity improving in the past year. In 2007, about 11 companies entered the market through an IPO, while six made a secondary offering. The total value of raised funds via IPOs exceeded 350 million leva. Most of the new entrants in the market enjoyed strong investors’ interest and their issues were several times oversubscribed. This by itself signalled the need for new companies on the market. Though the companies that entered the market in 2007 came from different sectors of the economy (like banking, base materials, food and beverage, energy), many industries are still not (or barely) presented on the exchange. This represents great potential for companies from these sectors to raise capital via the stock exchange. If they present attractive fundamentals and good growth perspectives, they would probably attract great interest from investors.
Though many Bulgarian companies have expressed their intentions to go public, they would probably not enter the market at least until the end of the year. The global market turmoil that followed the sub-prime crisis in the US and fears of slowing world economy led to a deteriorating market sentiment in Bulgaria as well. Thus, many domestic companies have been forced to postpone their IPOs until better conditions are present on the market. The few Bulgarian companies that dared to go public during this time had little luck in raising the funds they were seeking.
Privatisation or raising capital for large state-owned companies through the stock exchange is also a way to improve liquidity on the market by introducing companies with a predominant market position within an industry not yet present on the domestic exchange. Such procedures, involving selling stakes in state-owned telecommunication, utility or other companies, have already been undertaken in Croatia, Romania and Turkey, while Serbia launched such a procedure this year. Such IPOs are largely welcomed by domestic institutional and individual investors, and are also a good way to attract more interest to the exchange from abroad (all in favour of better liquidity of the market). So far, the largest privatisation deal through the Bulgarian Stock Exchange – Sofia was the sale of a 35 per cent stake in the Bulgarian Telecommunication Company in 2005.
However, there may be some light in the tunnel. The new strategy of the government regarding the energy sector involves the creation of a large holding company, which will encompass the major state-owned companies engaged in natural gas and electricity production and distribution. This “megastructure”, if created, will probably be one of the largest companies of this type in the region and may have the potential to become one of the major players in the energy sector in Eastern Europe. One of the reasons for the creation of the holding company is to access more favourable financing, with listing on the domestic and foreign exchanges being one of the options. However, perspectives for this to happen remain dim.
Another opportunity for increasing liquidity is presented by introducing new instruments to the market. Though there isn’t a derivative market, recent amendments in “Ordinance number. 16, regarding the conditions and procedures for executions of margin purchases, short selling and lending of securities” that come in to force in mid-August, are relaxing some of the requirements for short selling and trading on margin. In general, this will give investors on the Bulgarian Stock Exchange – Sofia more flexibility in their trading strategies. Still, just a few companies can live up to the requirements of the Ordinance and the introduction of short selling and trading on margin will not affect liquidity in the short to mid term.
