1) Emerging Markets wishlist is mostly seen like this - Asia, LatAm, CIS, CEE...and in the far back corner there is the balt-country. So, definetley nobody expects much - which is a good thing.
2) The views on Latvia and Lithuania are more soggy than on Estonia. Even now, the shape of things that was kept by Estonian government until 2005 continues to impress and the eurozone bet seems plausible even for them.
3) Also there was a statement once that the currency is overvalued. Which to some extent must be true, but it also seemed that most of the perception and analysis was based on some mid-2008 data. Things have changed after that! Nobody knew that Estonian CA is leveling out or that real estate prices have already adjusted at 40% levels from peak, we have wage deflation and unemployment hitting 11%. After that, it mostly seemed that eurozone is a decent idea.
4) Liquidity. Well, here we are living in the final frontier. There is € 5 billion total equity capitalization for stock markets in all of the baltics - which is actually is more like € 1 billion, given our float. Remember the day it was € 16 billion in 2007? Even then it was amost-a-decent-sized-market-but-still-quite-small for most of the bigwigs. So, its still a very small box of chocolate and not particulary tasty one yet - since everything is relative.
Conclusion: There is A LOT of noise out there on baltics, which is getting a bit boring for everyone since its not news any longer. The interest is there and reality looks better than it seems from distance - especially since the economic data referred to is quite old, given how quickly things can change in small economies. Estonia sticks out in a very positive way and eurozone accession can get the country on Mythbusters. But nevertheless, the equity market needs to become broader over time to get the portfolios looking this way and competitiveness has to increase to keep that CA going up. Will the increasing productivity do the trick or past months have been just a blip? We´ll see!
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The 80% drop (from € 16 billion to € 5 billion) in equity capitalization surely drops the Baltics below the liquidity radar of international investors, especially when combined with the currency and political risks and volatily of the region. The risk-reward ratio may be simply out of balance. As such, we will be hard pressed to attract significant capital to the region.
ReplyDeleteBesides, it is difficult to speak in generic terms regarding the Baltics as one market or community, as the cultural and economic situation can vary significantly for such a small region (drastic differences in religion, language, minority population, business culture, taxation, state budgets, etc).
Euro adoption should not be viewed as panacea for the region, but would certainly add some currency stability and credibility as well as draw attention, even if temporarily, to the availability of potential bargains in the Baltics.
Yrjö Ojasaar
I agree fully that with existing liquidity its difficult to get big flows moving, especially since all the other pastures look much greener. Once when Hansabank was de-listed, it also seemed to be the end of days for liquid assets. But then followed the happy times. What will be the main trigger in the future? What sector? We can say it wont be the internal demand in all three balts for few years. For sure it is the best time to do business - if you can make money now and grow even at a mediocre rate, then one day it will be very well worth it.
ReplyDeleteThe belief that currency is overvalued seems (at times) to come from the belief that it was fairly valued when it was introduced. A false assumption - but nonetheless many big names make it.
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