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Getting out of the lobster trap

  • 2008-05-28
  • Louise O’Dwyer

Taste the difference: This is one sea food dish investors should be wary of in the current climate.

There are two kinds of people in the world.  People who understand the stock market and people who know absolutely nothing. The former think they are better than latter, because they have insider knowledge on how the world actually works. Right now the Baltic bourses are a pretty good way to lose your shirt, if you don't know what you are doing. But the wise investor can make his way through.
Don't  just take our word for it, do your own investigation. As Alexander Pope said, "a little learning  is a dangerous thing, drink deep or taste not the Pierian spring." This week's industry insider looks at the stock market.

VILNIUS - Suppose you took an investor, held a gun to his or her head and said you must invest in Baltic stock. Someone who loves money more than life and is thinking about their children's inheritance might say, "I would rather you pulled the trigger."
Things are not looking good on the Baltic bourses.  The Baltic stock markets are small, illiquid and immature. Unless there are profits to be made, private foreign investors have to question whether it is worth investing in the region at all. The Baltic markets have been described by The Baltic Times columnist Peter Folkins as a lobster trap 's easy to get into by not easy to get out of.

Particularly hard hit have been the shares of industries related to real estate and construction, timber and logging companies and big retail stores.  Other vulnerable industries include transport and tourism.
"When one industry is hurt in a downturn, there is a ripple on effect that affects industries related to it," said George Forde, a European market analyst from Ireland.

"In simple terms, if the construction trade is hit, then the timber trade will suffer as demand decreases, this will increase pressure on the real estate market as housing prices increase, which will then have a knock on affect on tourism," he said.

According to Lina Vrubliauskiene, an analyst from the economic sub-department of Hansabankas, Lithuania, now is not the time to buy shares in any company that is in any way related to the property market.
"The real estate sector in Lithuania is highly leveraged, and investors financing developments with mainly borrowed funds might be out of the game," the analyst said.

"Related sectors, such as timber, wood products and furniture are likely to be affected by a slump in real estate sectors both in Lithuania and abroad," she said.

Despite improving risk assessments in early 2008, the Baltic countries are currently in an awkward position in the financial markets. Latvia is expected to have the largest economic downturn of the three states.
Lithuania is the most stable of the three Baltic stock markets, especially the food sector. This has been beneficial for related sectors including agriculture and the chemical industry, which specializes in producing fertilizers. Analysts say the country is not on the same cycle as its northern neighbors, and may soon be facing its own downturn.

The Bright Side
It is not all doom and gloom. Market analysts say there are still opportunities to invest in the right sector.
One area worth looking into is telecommunications. Tonis Maar, an executive at Swedish mobile giant Ericsson, argues that telecommunication stocks always do well when times are bad because people spend more time on the phone.

Other analysts argue infrastructure will be the sector to defy the current downturn.
"The future of investment in the Baltics is in the areas of telecommunications and engineering," said Forde.
He gives the example of his home country, which he says was in a similar position to the Baltics economically in the 1980s with mass emigration and a shaky economy.

"Our engineering industry blossomed as we worked with the EU to raise the standards of our infrastructure, etc., to match the rest of Europe. I would assume similar trends will be seen in the Baltic states," Forde said.
Forde believes the innovativeness of people in the region will encourage foreign investors to stick with it.
"The Baltic states are quickly becoming front-runners in this area [telecommunications]. Estonia, for example, was responsible for Skype, and Google is looking to Lithuania to build its new data centre," he said.
This is also the view of Gediminas Dubauskas, a researcher at Vilnius University who is confident that more investors will come to the region.

There is always EU money to save the day. If you had to put your money somewhere, public utilities and companies sponsored EU funded projects are still a good bet.
 Vrubliauskiene believes large engineering projects run on granted EU funds should withstand negative global processes.

"[The] EU budget period of 2007-2013 has allocated significantly higher funding to the Baltic states, and the national governments are not expected to cut public investments for such projects even in the case of a domestic slowdown of the economies," Vrubliauskiene said.
"I would also advise investing in companies that are affiliated with EU funded programs. These may be involved in infrastructure, power etc… These countries are a solid investment as they work in areas that need constant improvement. That is why there is a mass exodus of companies from Western Europe to the East. They are following the market," the analyst said.

Strongest Baltic stocks:

Estonia
Eesti Telekom
Harju Elekter
Saku Brewery
Tallinn Water

Latvia
Grindex
Olainfarm

Lithuania
Agrowill Group
Rokiskio Suris
Sanitas