The recent sharp decline in Ukraine’s stock market – which dropped 44 percent from April 26 to May 25 – was part of a global trend and not based on domestic factors. The local exchanges joined the downward slide seen on markets across the world, demonstrating a traditionally higher volatility and falling much deeper than their regional peers.
Analysis shows clear signs of overshooting and a strong upside potential in a number of liquid quality stocks. The 18 percent upward bounce on May 26 indicates there are bottom fishers in the market who share this view.
Cash is king in the global markets again. Within the last four weeks stock exchanges across the continents lost several months of past growth on concerns that Europe’s debt crisis might indicate deeper problems in the world economy. How long can this global volatility last and what are the prospects for Ukraine’s stock market?
Greece’s public debt problems set off the alarming tendency worldwide.
The disruptive wave hitting stock indexes originated in Europe. Greece’s public debt problems revealed structural limitations of the unified European currency and put the disturbing levels of budget deficits across other European countries in focus, setting off alarm bells for investors globally. On the backdrop of the market’s worries about potential acceleration of the problem and its spillover on other economies, the European regulators faced a challenging task of endorsing an ample support plan to finance the deficit. The U.S. Congress tackled a similar situation in 2008, however because of the EU’s diverse structure it took European regulators longer to agree on a conclusion. The protracted uncertainty shook investors’ confidence in the state of the markets and caused a massive global sell-off.
On May 18, in an effort to protect the dwindling value of European securities from speculative trading, the German market regulator prohibited naked short selling in certain assets. For many investors the ban signaled the risk of even bigger potential problems ahead, triggering a flight from euro-denominated securities and naturally depressing the value of the European currency. As a result, the euro hit its four-year minimum at 1.2223 and is currently trading at 1.2287 to the U.S. dollar, compared to 1.4406 at the end of 2009.
Emerging markets were not immune from the global sell-off. Managers of open-ended mutual funds faced massive redemptions and were forced to get rid of some of their securities swiftly. The more risky assets in developing countries were sold first, which hit Ukraine along with the emerging market giants of BRIC – Brazil, Russia, India and China.
Ukraine replicates global trends with higher volatility – falling deeper and recovering quicker.
The Ukrainian stock market is traditionally more volatile than other markets in the region, primarily because of its limited liquidity. This causes sharp increases in stocks in periods of growth when there are plenty of buyers and abrupt declines during market downturns when investors desperately try to sell securities.
This year so far perfectly conforms to this tendency. During the first four months the Ukrainian stock market expanded by nearly 80 percent, putting it among global growth leaders. At the same time key global markets (both developed and emerging) demonstrated less impressive growth, with Russia showing the best result of 12 percent growth since the beginning of the year. When the correction unfolded, Ukrainian market lost over 40 percent over four weeks. Other markets’ losses ranged from 10 to 20 percent during that time. Predictably, the first bounce which happened on 26 May and amounted to 18 percent also exceeded positive results of the benchmark global exchanges.
The Ukrainian market’s remarkable growth of January-April was almost completely erased by the May decline, and the year-to-date growth currently stands at approximately 18 percent. Nevertheless, Ukraine continues to show one of the best 2010 results globally, since substantial corrections hit other markets, too. For instance, the leading emerging economies indices are still below their Dec. 31 levels: Russia’s RTS index declined by almost 10 percent, India lost 7.7 percent, Brazil – 17.5 percent, and China – 19.9 percent.
So, what happens next?
The Ukrainian market was quick to rebound from deeply oversold levels as selling pressure eased on positive U.S. economic statistics. Even despite the technical one-hour suspension in intraday trading after the market rose 15 percent, the KP-Dragon index closed up 19.2 percent and the Ukrainian Exchange rose 18.2 percent on $14.5 million of combined exchange turnover, as buyers chased all the blue chips and many second tier names higher.
It is not yet clear if the market rebound on May 26 was a turning point and we are looking at a positive trend again. Whatever the case, Ukrainian exchanges have proved their ability to recover from their record-breaking declines at a record-breaking pace.
At least in the mid-term, Ukraine’s market will continue to be strongly influenced by news from abroad. It is now obvious that the global recovery will not be as smooth and rapid as the markets expected before the May correction. Nevertheless, the consensus opinion still points to the global economy expanding this year. Current challenges facing the Eurozone countries are of a smaller order compared to the subprime mortgage market collapse in 2008. Fundamentally, many Ukrainian companies and industries are still far from their fair values, and, depressed by the recent correction, they offer rare growth opportunities to a mindful investor. Based on different scenarios, we expect that the market will return to a steady upward trend within the next two to six months.
Andriy Dmytrenko is director of equity sales at Dragon Capital, a Kyiv-based investment bank. He can be reached at [email protected]
