Recent rally not fully based on fundamentals

  • 2009-10-01
  • Staff and wire reports
TALLINN - The strong rally in the Baltic states' stock markets sparked by TeliaSonera's bid for the shares in Eesti Telekom that it doesn't already own masks underlying differences in each country's economies which could prevent further across-the-board price gains, says executive chairman of investment bank Trigon Capital Joakim Helenius.

Estonia's Ministry of Finance said the state has agreed in principle to sell its holding in Eesti Telekom at the offer price of 93 kroons (5.96 euros) per share, plus an additional dividend of 6.99 kroons per share from retained earnings, reports news agency bbn.ee. Additional revenues from the sale would include dividends from retained profits over the 2009 's 2011 period. Estonia would boost this year's budget balance by 518 million kroons.

Investors shouldn't lump all Baltic stock indexes in one group, but should instead look for differences in the countries' growth outlooks, as the former Soviet states emerge from their recessions at different paces and with different degrees of fiscal health, said Helenius, reports Bloomberg.

Latvia and Lithuania are having "serious problems," while the economic plight in neighboring Estonia is "much less serious," says Helenius, whose firm oversees about 680 million euros' worth of assets in central and eastern Europe. "When people suddenly realize, my God, how serious these problems are, there could be a relative sell-off in Latvian shares."
Equity investors in the Baltic region "should sell Latvian stocks and buy Estonian, based on the countries' divergent economic and fiscal outlooks," he advises.

The three Baltic nations are suffering the deepest economic contractions within the European Union, led by Lithuania's 20.2 percent decline last quarter. All three countries peg their currencies to the euro, obliging them to deflate their economies through spending cuts to maintain trade competitiveness, instead of relying on a weaker currency, through depreciation.
Latvia's central bank considers that though corporate lending remains sluggish, "soaring stock prices of Baltic corporations suggest that investors' interest in the region is reviving."

Estonia's OMX Tallinn stock exchange, says Helenius, may climb as much as 30 percent as soon as investors "buy into the government's assurances that it will adopt the euro by 2011." He warns however, that Latvia's OMX Riga exchange "may erase gains as political struggles within the government delay budget cuts and risk worsening its economic situation."

The Baltic states' stock indexes track each other "on an assumption the region's share values are linked," says Helenius. Latvian and Lithuanian shares were among the biggest global gainers in the last month, climbing 31 percent and 30 percent, respectively, after Sweden's largest phone company TeliaSonera announced its buyout bid for the shares in its Estonian and Lithuanian units it doesn't already own. The Estonian stock market advanced 19 percent in this period.

All three markets have pulled back slightly at month-end.
"The markets are viewing the Baltics as one, and following TeliaSonera's bid, markets bid up Baltic stocks altogether," Helenius said. "This is where I really see a distinction between Estonia and Latvia, and to lesser extent Lithuania."