Ukraine’s top-rated PFTS stock exchange experienced a 7% fall only two hours after opening last Tuesday, with metallurgical, machine-building, and chemical businesses leading the fall, due largely to fears over reduced future export earnings due to a possible global economic slowdown. However, after the US Federal Reserve’s emergency 75 point cut in interest rates was announced later in the day – itself the largest cut in the benchmark rate in more than 23 years - Ukraine’s PFTS index ended the day in better health, registering a 3.6% fall.
The worst performers on the Ukrainian market, which had already entered a slump on the Friday and Monday prior to the Tuesday crash, were RaiffeisenBank Aval (-9.7%), chemical giant Stirol (-7.8%), Mariupol Machine Building Plant (-6.2%). Alchevsk Metallurgical Factory and Azovstal Iron & Steel Works experienced a 2.7% fall each, while Yenakievo Metallurgical Factory even enjoyed rebounding into positive numbers (+0.8%).
Trading was reported extremely brisk on the traditionally sleepy Ukrainian financial market throughout the turbulent Tuesday, with nearly USD 15 million worth of shares changing hands. An abundance of purchase orders registered before the day’s close was also interpreted as an encouraging sign of the Ukrainian market’s resilience and ability to bounce back from the global slip.
Financial experts have been optimistic in the wake of the global scare. “When viewed together with the positive sentiment tied to the rate cut and the fact that the US stock market closed just 1% down overnight, this indicates that the average international investor is much more likely to stay than leave, which is all the Ukrainian stock market needs at the moment. Local players were already willing to provide support but appeared to be too few to stand against the tide,” says Denis Shavruk, an analyst with Alfa Capital in Kyiv.
Recession looming for the US?
The international media led with stories of a new Black Tuesday last week as markets reeled from the aftershocks of the American economic slowdown and sub-prime crisis. European shares fell nearly 6% last Monday, their biggest one-day slide since the September 11 attacks of 2001. Elsewhere Asian stock indices saw some of their largest declines in decades. Global financier and philanthropist George Soros added to the sense of panic, saying that the world was facing the worst financial crisis since WWII and the United States was threatened with a serious recession.
“Until recently, investors were hoping that the US Federal Reserve would do whatever it takes to avoid a recession, because that is what it did on previous occasions. Now they will have to realise that the Fed may no longer be in a position to do so… If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield. Where that point is, is impossible to determine. When it is reached, the ability of the Fed to stimulate the economy comes to an end,” he wrote in the Financial Times on January 22, warning: “The danger is that the resulting political tensions, including US protectionism, may disrupt the global economy and plunge the world into recession or worse.”
However, a US tax package later in the week and the chance of another Federal Reserve rate cut helped ease recession fears and fuelled gains in stocks across global markets, emerging markets and in high-yield currencies. Soros said that although it be “very difficult to avoid” recessions in the US and UK, he is “not looking for a worldwide recession.” The billionaire also said that the current market turmoil is a sign of global influence shifting to the developing world. “I’m looking for a significant shift of power and influence away from the US in particular and a shift in favour of the developing world, particularly China,” he said in an interview with BBC News.
A haven for Ukraine
Accelerated economic growth over the past few years has placed Ukraine firmly in the company of countries experiencing booming stock markets, and analysts are confident that investing in the Ukrainian stock exchange market will remain a profitable undertaking. The Ukrainian market is currently regarded as very narrow and illiquid, which has in fact helped it remain relatively stable in the face of plummeting stock exchanges and global financial crises.
“The local market dropped 2-3% on Monday and 3-4% on Tuesday. It is not immune to external shocks and the stock market in particular does have significant investments held by foreign funds. The major risk is that these funds reduce their exposure to equities generally and move out of the Ukrainian market because of shifts in other markets – several markets, including those in Asia, have reported exactly that, and despite generally robust growth have seen markets fall as larger international players sold off parts of their portfolios. This is counter-balanced by the growth of local investors in the Ukrainian market, who may be in a position to purchase some of these assets sold by international funds and thereby provide support to the Ukrainian stock market,” comments Jathan Tucker, Head of Trading at Concorde Capital.
“The Ukrainian market fell more slowly due to a number of factors including the absence of trading on margins and the absence of an equity repo market,” adds Denis Matsuyev, Director of Trading & Domestic Sales with Dragon Capital. Encouragingly, market analysts reported that no panic was observed among investors, that the fall was not critical, and the Ukrainian stock market still on course for forecasted 20-45% growth in 2008.
“The future for the stock market on the longer-term horizon is still very bright, due to the strong growth of the economy, increasing transparency of companies, and development of local business and investment expertise. The market continues to trade in an orderly manner and we have yet to see any sort of panic. The recent fall in equities globally, particularly when coupled with the aggressive inter-meeting rate cut, have injected a degree of volatility into the market in the short-term. As international players look to either sell equities to reduce exposure, or else find ‘safe havens’ in the form of emerging or high-growth markets, we’ll continue to see swings that provide both risks and opportunities,” states Tucker.
“The internal situation in terms of political and economical development is very stable and investors are in general very positive on Ukraine,” echoes Matsuyev. “It is clear that they don’t feel comfortable during periods of global turmoil but only a few international institutional investors fixed profits at more than USD 1 million for the past week,” he adds.
Finance Minister Viktor Pinzenyk was quick to respond to any potential panic last week, assuring investors that the current turmoil on the global stock market would not hurt Ukraine. “The turnover in the Ukrainian stock market is so small that the tumble on the global stock markets is not dangerous for us,” he assured.
