The Bulgarian Stock Exchange (BSE) blue-chip index known as the Sofix topped 1900 points in the first days of October 2007 after five months of persistent gains.
This is 93 per cent higher than a year ago. The Bulgarian stock market is definitely among the best-performing in Europe. Gains are broad-based as most small and mid-sized companies also enjoy solid price increases and improved liquidity. Moreover, lots of individuals are being attracted to investing in stocks and becoming part of Bulgaria’s modern lifestyle. The result of 28 billion leva market capitalisation of the BSE in September was augmented by exciting news. The BSE is to adopt the trading software of the Deutsche Boerse next year, which will open up the possibility of further development of the market and a strategic partnership with the leading bourse operator.
Doubling of a stock price in 12 months is no longer news because it has become the usual trend for Bulgarian publicly listed companies. The local market is more liquid than a year ago and newly listed companies are contributing the most. This allows the market to react quickly and with improved efficiency to any corporate news.
Apparently, in the current period there is no crucial news driving the market up and down. Q3 financial results will be released at the end of October, and the rising market is in reality fuelled by investors’ great expectations about corporate profits. This state of mind of the market is also no longer a surprise – an optimistic outlook has been around the stock exchange for quite a while.
The upward trend of the Bulgarian stock market is being shaped in the year of Bulgaria’s EU accession, rising exports and growing demand for most industries. Financial stability and the credit boom are other factors favouring economic growth, and more importantly, the development of capital markets. Bulgarian stocks were unaffected by the mortgage crisis and the worldwide credit crunch earlier this summer. Foreign investors were reluctant to sell their holdings in Bulgarian stocks in August, despite the new approach to risks of investments and the growing prospects of a global economic slowdown.
Most analysts find the Bulgarian stock market overpriced. This has been a matter of debate in recent years. From time to time, some expert opinions group in defence of the concept of a need for a price correction, which they call – in professional slang – “healthy”. It is viewed as a calming of the price trend, restructuring the portfolios of investors and a subsistent basis for future growth. The latest similar correction occurred at the beginning of May 2007, but recent market activity means that obviously there is no need to worry until next May. There are also many reasons for an optimistic attitude towards the Bulgarian stocks even in the long-term – in the course of a few years, 
for example. There is good reason as well for the euphoria on the market to continue in the next months, next year or two. The best of all reasons derives from the paradox that there is much more cash available in the country than investment alternatives. Millions of leva are flowing into the pension system each month and this is money that represents a long-term investment. Local mutual funds have already reported a total of more than 700 million leva, and they are also looking to find their place on the stock exchange. Investing in mutual funds generates considerably higher returns than bank deposits and even credits. Investors are not only transferring savings from deposits to mutual funds, but also taking loans in order to participate indirectly on the stock market. Some are starting to trade themselves. And all they do is buy. Local shares are really expensive if weighed through the risk of forecasts not happening, low liquidity, and lack of transparency; or due to the enormous pace of growth. Yet, this does not mean that share prices will not hike further. A high share price and a comparison with the profit and the assets of a company are two different things. I would not be surprise at all if nobody mentions that the Bulgarian stock market is overpriced even one or two more years ahead. However, it seems that in this shiny gift of the Bulgarian stock exchange that investors have been handed, there is something ticking... This would be the sound of the first correction of the market which sooner or later will bring share prices down, just because prices cannot always rise. It will be very painful and upsetting for individual investors.
For the mutual funds market, this could even be dangerous. In three to six months of 300 million leva more having accumulated in mutual funds, would people handle a drop of 10 per cent? It would not be a crucial fall of the local stock exchange, but the impact on mutual funds could be worrying. The correction could generate a wave of money being withdrawn from mutual funds because people are still not aware of all the risks of the stock market and do not want to incur losses. On the other hand, such a cash haul would force mutual funds into selling shares and bring share prices further down. We did not witness such a phenomenon in the first spring correction because of the inflow of fresh cash on to the market.
The most balanced way to go is to choose mutual funds that do not rely on one or a few companies’ performance which might drag returns down. This could be the winning formula for participation in the local stock market benefiting from its best years of its life.
