Ilian Scarlatov: Bulgarian politics is the authority of the stock exchange at the moment (27.02.2013)


“Reduction in the uncertainty surrounding the Bulgarian Stock Exchange is expected after the elections. I expect very significant upward movements 1 month after the elections” said Ilian Scarlatov, Managing Partner at the Bulgarian boutique Investment Bank Mane Capital.

- Mr Scarlatov, we are seeing a downward trend on the Bulgarian Stock Exchange (BSE) in the first two days of the week as a result of the political instability and the failure to assemble a standing governmental body. Is it panic that drives the sales on the BSE or is it expected to see such movements given the current situation?

If panic was driving the current sales we would have been experiencing a much larger drop in the stock prices. The trading volume at the moment is satisfying, which means that there are investors who are also looking to buy. For example, 200,000 shares of Central Cooperative Bank were bought and sold.

Panic is associated not only with excessive selling but also with buying withdrawal. In this case, if the movements on the BSE were driven by panic, we would not have witnessed such high trading volumes.
We saw panic during the early days of the crisis of 2008 and 2009, where trading volumes declined by 75% for a month. This is panic - a lot of sellers and no buyers. At the moment there is adequate buying volume and I think most of the trades are done with speculative acumen from long-term investors, who are betting that other investors will exit their positions in the face of uncertainty. Currently, some buyers are willing to wait 2 months until the preliminary elections.

- What is the reason for the sharp drop this Tuesday (Sofix fell by 4.4%)? Is it only due to speculation?

The main reason is uncertainty, which is in turn a function of two factors. Firstly, the two leading Bulgarian political parties were unable to form a government and secondly, the election results in Italy, where the vote was very fragmented and sustainable government is unlikely to be established.

It’s relatively intuitive for the investors in Bulgarian stocks to derive analogies between the situation which is developing in Italy and the future of the Bulgarian political scene. This is of course something that increases the investor uncertainty.

Such events appeal to speculators, who can “utilize” them. In this particular case, whenever there is uncertainty, investors will be less willing to take on risk, which means they will close their stock positions. They can of course also close them with speculative acumen- in the hope to buy them back at lower prices.

I don’t think we can talk about panic. It is true that the 4.4% drop is worrisome, however given the current political environment it’s rather normal.

- What scares the investors the most at the moment?

Uncertainty - the fact that they cannot predict what will happen in the next 2 months, because GERB and BSP are refusing to form a temporary government. This uncertainty scares them.
I would guess that most of the selling pressure is exerted by smaller Bulgarian investors, as a large international investors will not be able to exit their positions, given these low trading volumes.

- We know that predictions are also traded on the capital markets. The downward movement began after SOFIX reached 412 points on 13th of February. One week before the government resigned. Did the BSE predict this event?

I don’t think so. This was more of a technical correction, which followed after very strong gains in January. The fundamentals are strong and can potentially support the upward movement. However, given the political environment this will be rather difficult to happen- the game plan is to wait for the next two months.

The correction was technical; it was not influenced by political factors.

- What drove the strong gains at the beginning of the year?

We saw similar gains in January 2012. Usually, investors are comparing the gains from the BSE and other European exchanges after the end of the calendar year.

Last year, the gains around other European Exchanges were significantly higher than those of the BSE. This encouraged buyers to “step on the gas” but the “fuel tank” was dry by the middle of February.
In 2012, the Stock Exchanges recorded peak gains, while BSE recorded almost nothing. At the moment there is no efficient market mechanism under which assets can be measured even at their approximate fair value.

Currently, the worst-performing companies are over-sold. The best ones are too. When there is no difference between a valuable and worthless asset, all market valuations are depressed, thus we cannot be considering this market as efficient.

- Is there a light at the end of the tunnel in the current situation?

Whatever happens, the market is not going to respond positively. The political situation is currently dominating the BSE. We will not see any upward movements until the elections are finished. As long as there is uncertainty, bad news will always overshadow good news in the stock prices, even if all companies show very good results.

- When do you expect the situation to be resolved and investors to calm down?

After the elections, when we have a government. I expect strong upward swings in the month following the elections.
This will relax the investors, because there will no longer be such uncertainty.

- Are the investors biased towards a given political party- left-wing or right-wing?

I could not say what the investor’s acumen is in this particular matter. One thing is sure, they will want a sustainable government.

The worst case scenario is coalition, as this creates lack of political stability. We all remember what happened during the “Three Party Coalition” term- each party was focused on its regional ministries and nothing happened in terms of overall political changes for 4 years.

- Is there anything else that can positively influence the BSE at the moment?

Before the elections, there is absolutely nothing that can make the BSE go up. The ultimate government which we will end up having after the vote will provide upward pressure on the market. Only then, we will see the effect of the positive factors, which accumulated during the time we had no government.

- Is the privatization of the BSE going to slow down because of the current government’s resignation and how will this affect its development?

Thus far, we have not received a letter from the The Privatization and Post-Privatization Control Agency to halt the privatization procedure of the BSE and the Central Depository AD. At the moment we are resuming work with Patria Corporate Finance, which won the auction for consulting on the privatization of BSE and the Central Depository AD.

Until we receive a formal letter, we cannot speculate on what will happen in the future.

The privatization of the two entities was a priority of the resigned Financial Minister Simeon Djankov. Given that he is no longer in office, the project might be frozen, but until we have an official confirmation letter, everything we say is nothing more than speculation.

- Can the BSE regain its losses by the end of the year?

The current downward movement is insignificant. This drop can be regained in a matter of days. The size of the downfall is not frightening at all.

The worst case scenario is for the privatization of the BSE to be halted, which was supported as we saw in the previous months, as it will impede the market growth.

It is far from clear what will be the priorities of the next government. We were very close to reaching our goal and privatizing the BSE, however circumstances which were out of our control precluded us from achieving it.



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