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According to sources from a well-known mutual funds marketing agency, the lure of the Balkans was such that even professional investors threw caution to the wind and went long with Serbian and Macedonian equities only days before the stock markets in the region recorded the biggest drops in years. Some Slovenian investors, counting on a continuous rise of indices, financed their purchases of stocks with bank loans. After last month's correction, it is not only the investors, but also the banks that are looking harder at their exposure to emerging Balkan markets and re-evaluating the appropriateness of stocks as collateral for their loans. Falling share prices (and, consequently, the value of the collateral) trigger margin calls from banks, prompting leveraged investors to either top up their accounts with additional capital or repay their loans earlier.

The colour of money

Although the Ljubljana Stock Exchange (LJSE) followed the Balkan exchanges into negative territory last month, investors at LJSE have generally had a good year. In August last year, the main market SBI20 index breached the 12,000 point benchmark for the first time in its history, but it has since then shed the most of its gains. The index now stands at less than 9,000 points again, down 27.7 percent from its August high. Taking a longer view, however, investors can still be satisfied with the performance of Slovenian equities. In March 2007, the SBI20 index stood at 7,400 points, meaning that the index gained 19.3 percent in the 12 months up to last week.

Record economic growth of 6.1 percent in 2007 has failed to stop the downward trend of LJSE indices that started in August after it became clear that the subprime mortgage crisis would not only depress growth in the US, but would also spread to Europe and emerging markets around the world. When leading Slovenian companies published their results in the end of February, investors were not inspired, although profits reached record highs.

Pharmaceutical producer Krka, for example, said it generated a net profit of EUR 132.85m in 2007, up 18.52 percent year-on-year. The company's revenues stood at EUR 780.9m, which is a 17 percent rise over 2006. When such news not only failed to impress the investors, but also do not put a floor under a company's share price, then it is clear that something must be wrong with the valuation of companies. The share price of Slovenia's only independent pharmaceutical company and one of its most successful exporters dropped around ten percent in March.

Paint it red

"Stock market participants explain that Slovenian equities have been buoyed by expectations of takeovers and privatization of state-owned firms." The latter has not always worked out as planned. While the sale of the state's stake in NKBM in November went smoothly, the privatization of the national telecommunications group, Telekom Slovenije, was temporarily halted last month after the two remaining buyers' offers were judged insufficient by the government. Both Skipti and Bain Capital valued the telecom group at EUR 400 a share: a fair price, observers point out, especially because Telekom Slovenije has potential liabilities arising from a number of lawsuits against it.

After the government decided not to proceed with the sale of its stake in the group, the latter's share price plummeted, pulling the SBI20 index down with it. Telekom's share price is now down 18 percent from its high of EUR 306 at the beginning of March. While neo-liberal commentators deplored the fact that the government decided to sell what they say is an inefficiently run company and forego a significant takeover premium, others are more sanguine. Andrej Vizjak, a partner at AT Kearney, a consultancy, recently said that the telecom operator, being technologically on par with major European telecoms, can easily survive on its own.

Crunch time

With the uncertainty about the government's privatization strategy scaring away potential investors, the stock market looks to the industry bosses to inject some of the much-needed action into the market place. While Boško Šrot, the CEO of Laško brewery, is manoeuvring to take over Mercator, Slovenia's biggest grocer, Igor Bavčar, the boss of Istrabenz, is consolidating the ownership structure of the leading tourism services and energy holding. Both takeover attempts are likely to be unmasked as management buyouts.

However, as the volatility caused by the US financial meltdown spreads to Europe's financial markets, the LJSE will arguably see less takeover activity as it needs sizeable financing that in Slovenia only banks are able to provide. With international interbank markets periodically seizing up, lending between banks is becoming more expensive. Large European banks with exposure to the fragile US and EU real-estate markets are hoarding cash to have a capital cushion ready in the case of unexpected write-downs. This means that they charge Slovenian banks more for the privilege of providing them with the money needed to finance their lending activity.

Consequently, "stricter lending standards and higher borrowing costs for companies and households are likely to rein in credit growth." Banka Slovenije, Slovenia's central bank, expects year-on-year growth in lending to companies to fall from the current level of 30 percent to below 20 percent in the next two years.

Economists agree that the fallout from the US financial crisis is unlikely to directly influence the movements on LJSE. However, with tighter credit, domestic as well as foreign investors will find it much more difficult to raise the money to engage in the bidding wars that are so dear to an investor's heart.