The after-election recovery was emphatic throughout the first three weeks of October, with the PFTS index rapidly gaining lost ground in the first week of the month and reaching new all-time highs since the third week. A small correction on 22 October cooled down the market, but it gradually recovered over the following week, reaching new record highs, closing at 1177.0pts.
The October advance of the PFTS was 14%, resulting in an impressive 136% YTD. In our previous article we anticipated this upward market momentum, but the actual PFTS performance turned out to be even stronger than we forecasted.
Political situation benefits markets
The key reasons for the recovery on the Ukrainian equity market were the improvement of political dynamics in Ukraine, strong fundamentals on the micro and macro levels as well as the improving mood on the international markets. Among the most interesting stocks we see for the next month are Donetskgormash (DGRM), Ukrtelecom (UTEL) and Azovstal (AZST) as we discuss in more detail below.
Over the whole month of October, the top 5 winners by return were Novomoskovsk Pipe Plant (NVTR), Zaporozhye Ferroalloys Plant (ZFER), Dniprovskiy Steelworks (DMKD), Bogdan Automobile Plant (LUAZ) and Alchevskkoks (ALKZ).
The prices for these stocks skyrocketed and substantially outperformed the blue chips. Among the ‘top’ 3 losers by return in October were Donetskkoks (DKOK), UkrGasBank (UGZB) and Ukrsotsbank (USCB) — unlike most other stocks, these three dropped in price. The top traded stocks by volume came as no surprise and were Ukrnafta (UNAF), Yenakievskiy Steelworks (ENMZ), Centrenergo (CEEN), Zakhidenergo (ZAEN) and Dniproenergo (DNEN).
It is also worth noting that relative to other stock markets the PFTS regained its leading position, even managing to outperform most other markets in October, returning, for example, about twice as much as the Russian market (RTS) did over the same period. For November, we also expect Ukraine to do well relative to other emerging and frontier markets, both by return and by volatility.
Low liquidity remains an issue
The key issue remaining in the Ukrainian stock market is its relatively low liquidity, but this too is improving. The average daily volume on the PFTS throughout the month of October was about USD 6.43 million, 14.6% more than during the same period of 2006.
In October 2007, daily volumes were around USD 11.36 million, which is an impressive 451% year-on-year increase.
This trend is in part due to the relatively low volumes observed in October 2006, but of more importance is the fact that the volume being traded has been gradually increasing throughout 2007 and in October 2007 was already about twice the level observed in September 2007. We expect to see similar volume levels in November and an increase to about USD 15-20 million in 2008. The annualized daily volatility in October 2007 was similar to that in September and we expect it to rise slightly in November 2007.
Restructuring the stock market
On 29 October, the PFTS stock exchange implemented changes in the listing of stocks according to the new rules of Ukraine’s SEC. The biggest change is the move of the small, illiquid listed stocks (mostly placed on the third level of the stock listings) from the main PFTS listing into an ‘alternative PFTS listing’ (OTC listing).
As a result, about 90% of Ukrainian stocks left the main PFTS listing, only 10 shares remained in the first listing level and 25 shares in the second listing level. Besides delisting third level shares, such shares as AVDK, MSTB and KSTL were also moved to the alternative listing.
It is worth noting that with these changes, Ukrainian insurance companies and pension funds will be restricted from investing in the shares of the alternative listing — where they had been enjoying high returns but also faced higher risks.
On the other hand, 8 out of 15 companies that were under threat of delisting due to the absence of their consent for listing (ENMZ, MZVM, PGOK, ZACO, FORM, NVTR, KREN, LUAZ, and SHCHZ) gave their consent and were moved to the second level of the listings. We think this is likely to have a positive effect on the stocks of these companies.
Outlook for November
There are two likely scenarios for November. The PFTS Index could witness further healthy advances in November 2007. We regard this as the most likely scenario given the current political circumstances and the good micro- and macro- economic prospects of the country.
However, there remains a smaller but still sizable chance that the PFTS Index will experience a small downward correction next month if investors become dissatisfied with the fights around the coalition or if radical changes and re-division in privatised property ownership are promised by any new government.
Regardless of the many unknowns, as we enter November all our mathematical models agree on the general direction of the PFTS index for the month ahead.
The most conservative forecast is suggested by the exponential trend, which implies that the current market advance has jumped way beyond the long-term exponential trend and so a slight correction, perhaps in the first or second week of November, is quite likely. Alternatively, the most optimistic scenario is suggested by the random walk in differences.
Overall, the consensus of our five econometric models supports a positive outlook and suggest that the PFTS index will fluctuate within the 1198-1262 points range, with the central tendency being around 1230 points. Thus, a healthy upside trend is forecasted by the mathematical models.
Mid-term predictions optimistic
Although some investors remain sceptical about the longevity of the current world-beating performance, we believe there is a good chance that Ukraine will see another 3-5 months of market advances with some small corrections along the way.
The fundamentals for these assumptions are as follows: companies are showing good financial returns while becoming more productive and more transparent; macroeconomic performance continues to be strong and the political situation is slowly improving. Such prospects reduce the probability of a sharp fall in the Ukrainian stock market in the near future and increase the likelihood of a good market advance, especially if the political situation resolves itself relatively quickly.
Another important factor driving the PFTS is the rapidly increasing segment of private investors in Ukraine who are becoming disappointed with residential real estate investments which now look much overvalued.
The role they could play can be viewed together with that of domestic investors who are starting to allocate some of their assets to various Ukrainian mutual funds showing impressive performance over the last year (for example, the Millennium Progress Fund generated a more than 200% return over the past 18 months).
Yet another strong and important factor unpinning the PFTS rally is that Ukraine is more and more clearly appearing on the map of international investments. More foreign players are looking at Ukraine as a possibly lucrative opportunity and starting to make and/or increase their exposure. As long as the current economic momentum continues, with the political situation at the very least remaining on a level footing, the strong performance should continue.
This article is the opinion of the author and the author or abovementioned organisations are not responsible for investment decisions based on the contents.
