In terms of performance, there is much for those who have invested in Ukraine’s market to be pleased about. So it is natural to ask at this point: “What’s next”? Predicting what the final level of the PFTS or even an individual stock will be on December 31, 2008 is beyond the scope of this article, but there are several developments that anyone interested in the market should pay attention to.
International Recognition
In 2007, Ukraine finally appeared on the global investment map. Frontier market investors began to notice that the home of the companies that were beginning to appear in Warsaw, Frankfurt, and especially on London’s AIM was also a source for other firms preparing to reach out to the capital markets, and that many of these companies were already listed locally.
This recognition reached a peak for 2007 when the Wiener Borse created an all-Ukraine index. This index, which is based on the 10 most liquid stocks listed in Kyiv’s PFTS index, has already become the basis of structured products across Europe.
“We’ve already seen ABN-AMRO create a product based on this index, and Austrian banks have been interested, so we see this as a sign that market professionals throughout Europe are becoming more and more interested in Ukraine,” says Peter Keller, Head of Research at Kyiv’s Millennium Capital.
For 2008, international recognition is already on its way in the form of the MSCI Frontier Markets Index, which will comprise Ukrainian blue chips alongside those from other markets across the globe. “This is a major step forward,” says Sergiy Lesyk, Global Head of Equities at Galt & Taggart Securities, a subsidiary of Bank of Georgia. “Not only will it give more exposure for Ukraine in general, but listing Ukrainian companies alongside their peers from other lands says a lot about how the country is perceived by the international investment community.”
Increased liquidity
All of this extra attention from abroad creates a problem: where are they going to find stocks to buy? Keller at Millennium Capital points out that the lack of stocks available can be a bottleneck. “For an investment bank such as UBS to come in and create a fund would require about USD 50-100 million in stocks. On a good day, about USD 10 million is traded on the PFTS as a whole.”
For Ukraine’s equity market to get to the point that Europe’s largest investment institutions can work on the Kyiv market, the country’s perennial problem in the low number of shares available will have to be addressed. “There was an increase in liquidity in 2007, which is not a surprise, considering that in part it is correlated to the rise in stock prices. However, much, much more needs to be done. At the same time, there are companies such as EastOne’s NizhnoDniprovsky Pipe Plant buying up their own stocks in order to decrease liquidity before listing on other exchanges in Europe, which in NITR’s case means London,” Keller argues.
Lesyk at Galt & Taggart agrees, pointing out that one way to increase liquidity at home would be to staunch the flow of large companies listing abroad. “A number of funds won’t be able to set up their own indices based on Ukraine because there aren’t enough stocks to go around. There will be more free float in time. Part of that will come from bringing more companies to the Ukrainian local market instead of London’s AIM and that will require changes to the way things are done as well as attracting a portion of the investors who are now in London. I hope to see it.”
Overhaul and reform
Increasing free float in existing companies and luring more local firms to list at home will take changes to legislation in particular. For instance, a 50% plus one stake in a firm is not enough to get your way on a Ukrainian board of directors – you need 60% to have a quorum. As a result large blocks of shares sit in accounts because the owners need them for control. Though there were attempts in early 2007 to change this, the law did not pass. This and many other issues relating to Ukraine’s corporate law need to be taken care of.
Other stopping points affect only one industry or company. The state-owned telecoms provider Ukrtelecom, for example, will be the main beneficiary of a law regarding the portability of mobile telephone numbers. The ability to change mobile phone service providers while keeping the same number will enable many businesses who rely on the stability of their contact information to migrate to Ukrtelecom and it’s new 3G service.
Privatisations are another factor that will increase liquidity, and 2007 was not a banner year for the State Privatisation Fund. The much-vaunted Ukrtelecom privatization failed yet again, and in this case the attempt to sell relatively large stakes on auctions didn’t help. The change in governments and resulting shift in privatisation policy could bode well for Ukrtelecom as well as some other companies with large state-owned stakes.
Not everyone is in agreement, though, that a new Orange coalition will have the strength to push through the reforms that are needed. “The new coalition is much too delicate; not much change can take place,” says Sergiy Lesyk. Despite the political situation, “a mess, as usual”, he quips, he is upbeat in general. “The macroeconomic environment is benign,” he emphasises. And for 2008, the continued lessening of political interference in economic life could make itself felt.
Improving corporate culture
That business has bloomed over years of political upheaval points not only to the potential of the economy, but also to the ability of business leaders to take matters into their own hands whenever possible. The ability of Ukrainian companies to handle complete financial audits and both borrow and place equities on EU markets was not mandated by a political decision. Corporate leaders did it on their own. The improvement of corporate governance has unlocked value in companies such as Metinvest’s Yenakievo Steel, which has seen its stock price grow over 1400% this year.
Peter Keller says that the change in corporate governance is more than just better financial statements, and that many companies are now realising the importance of investor relations. “Astarta, which deals in sugar and inked a credit facility with ABN-AMRO back in the autumn, also put out an advert recently which in effect said, ‘Hi, we’re Astarta, and we’re listed in Warsaw’. That kind of reaching out for investors was unheard of a few years ago, and it points in a very good direction.”
What will 2008 bring?
Predictions for 2008 range from the almost apocalyptic to the near-ecstatic. Value is continuing to be unlocked and depending on your persuasion, the next great thing could be anything from selected steel stocks to consumer goods to chemicals. Sectors of the economy like the chemical industry tend to need lots of natural gas, which can raise concerns among investors worried about Ukraine’s problems securing steady supplies from Russia or coping with continuing price hikes. However, not everyone is worried. “Forget the gas, chemicals stocks are fundamentally cheap and getting clean financially” was one quote heard recently.
But the gas issue is a point to keep in mind, because as Ukraine integrates globally, it becomes more susceptible to economic problems elsewhere as well. Analysts point to the global credit crunch and the knock-on effects of the US sub-prime mortgage problem as a factor in the sag seen in Ukraine’s index in November. On the other hand, China’s steel exports are dropping – good news for their Ukrainian competitors. So nowadays, to answer, “Where will the equity market be on 31 December 2008?” one has to answer first: “How is the rest of the world”?
