Bullish on Latvian equity

  • 2004-02-26
  • By Leonid Alshansky
The situation last week on the Latvian stock market was relatively calm. It is evident that prices have consolidated on current levels.

The index of Rietumu Banka, based on the shares of the broader market, closed practically on the same level as the previous week - 123.53. For comparison, the index reached its historical maximum - 205.84 - on Oct. 14, 1997, and its minimum - 42.10 - on Oct. 28, 1998, just two months after Russia's markets collapsed. (The index has been calculated by Rietumu Banka specialists since January 1997 when its initial value was set at 100.)
On the whole, the equity market is retaining its bullish tendency, and the overall growth of the index since the beginning of the year has reached about 5 percent.
For 2003 growth amounted to an impressive 33 percent. However, the recent appreciation in stock prices contrasts to last year when the entire market experienced a surge. Growth so far this year has been restricted to a handful of stocks that managed strong financials - Liepajas Metalurgs, Valmiera Fiberglass and Riga Shipbuilding.
At the same time, shares of Ventspils Nafta and its subsidiary shipper, Latvian Shipping (LASCO), have also been on the rise. Since the start of the year shares of Ventspils Nafta have grown 10 percent (see graph below), even after rocketing more that 100 percent in 2003. Investor interest in the oil terminal continues to peak in light of the ongoing conflict with Russia's state-owned pipeline monopoly, Transneft, which a year ago ceased all deliveries of crude via the Polotsk - Ventspils pipeline. As a result, for the first time in 10 years Ventspils Nafta finished the financial year in the red.
Investors, however, are buying up shares in expectation of a privatization deal for the oil terminal. News that the government might return to the Latvijas Gaze model for selling Ventspils Nafta - dividing a controlling stake of shares between Western and Russian companies - has fueled interest. Practice shows that this type of compromise solution is most successful from both political and economic points of view.
Looking forward, we expect further growth in Latvia's equity prices throughout the year. Our optimism is based on two factors: First, many Latvian stocks are still undervalued, with their book values often significantly higher than their market price (in developed markets the situation is reversed). Second, in the light of the recent sale of the Finnish stock exchange HEX, which owns Riga Stock Exchange, to the Europe's largest stock exchange - Swedish OM - shares of Latvian companies should start seeing more demand on broader European markets by September 2004. This may facilitate the inflow of new funds into Latvian stocks.

Leonid Alshansky
is head of the analytical division
of the Investment Management Department at Rietumu Banka.