May 2020 Newsletter: ‘Baltic stock market further up’

Пост обновлен 19 июня 2020 г.

In May, Baltic stock market continued positive momentum of the preceding month, closing with a 4.64% gain. OMX Baltic Benchmark GI has increased 15.8% since the lowest point in mid-March and now is just 13.75% lower than its all-time high reached in February. This month index rally can be attributable to the performance of Tallink, which, having largest weight within the index and rocketing 20.6%, gave strong boost to the benchmark. In comparison with stock indices of the developed world, also in May Baltic companies cumulatively delivered better performance than those in USA and Europe. To wit, USA (S&P 500 Price Index, USD) and Europe (STOXX 600 Price Index, EUR) returned 4.53% and 3.04% respectively. Looking at how fast developed world indices are playing catch-up game after recent sell-off, USA stock market is recovering lost performance faster, while Europe is lagging behind both American and Baltic markets. USA market is 11.9% and Europe 18.73% away from February highs.

Figure 1. Baltic, USA and Europe stock market indices from February highs

Source: Alphinox, Thomson Reuters

Positive market sentiment in May was experienced as countries are gradually easing COVID-19 restrictions and central banks continue flooding equity markets with cash. However, corporate fundamental background is rather weak - businesses are reporting tumbling 1Q’2020 earnings. In Baltics, 54% of companies showed weaker operating earnings in first quarter this year versus same period in 2019. To compare, you see the same situation in USA, where 54% of S&P 500 companies reported lower operating income.

COVID-19 crisis and subsequent emergency lock-down measures has been a tremendous challenge for many businesses and particularly for their balance sheets. We had a detailed look at the financial position of Baltic companies to see the general trend.

Figure 2. Total Debt trend in Baltic Main list of nonfinancial companies

Source: Alphinox, Thomson Reuters

Last year we saw a significant spike in Total Debt of Baltic market companies, caused by changes in the accounting standard that obliged companies to adapt new reporting policy and classify lease payments as debt. And it seems that this dynamics is set to continue in 2020. Even though in 1Q’20 the amount of debt decreased by 0.3% vs. the previous quarter, it can be expected that the amount of debt will continue to grow. As such, Tallink has received a government loan in the amount of 100 million in May and Novaturas also informed on receiving a EUR 1 million tranche from the State of Latvia. Among main list companies, Tallink, alongside with Klaipedos nafta and Energijos Skirstymo Operatorius, is the biggest contributor to the amount of debt in the index, with those three names accounting for almost half of the Total Debt in OMX.

Figure 3. Baltic Main list Equity/Assets ratio trend

Source: Alphinox, Thomson Reuters

Considering Equity to Assets ratio of Baltic stocks, it has been sitting at ca. 50% during the last three years, however in 1Q 2020 it witnessed a decline as the companies increased their debt levels. Comparing with US and European peers, whose equity ratio stands around 33% and 36% respectively, Baltic companies appear to be more conservative towards financing.

Performance of companies from Baltic Main List

If March and April were months of two extremes, with almost all main list companies finishing in red at first (March) and then closing in green (April), then in May market has returned to some sort of ‘’normality’’, when the performance among stocks differentiated in a usual manner.

Figure 4. Performance of Baltic Stock market companies & world indices as of 31.05.2020

Source: Alphinox, Thomson Reuters

‘’All aboard!?!’’ – This month’s star performer was Tallink, recording 20.8% gain as investors were welcoming news on EUR 100mn loan that company received from the state, being able to defer existing bank loan principal repayments for year 2020, while passenger traffic returned in Tallink’s main route Tallinn – Helsinki, though not yet to the full extent.

Other top performers were to be found in Consumer and Industrials space – Baltika gained 14.3%, though on small trading volume. Lithuanian Auga group followed with 13.2% performance and Panavezio statybos trestas with 12.1%.

Monthly laggards also landed in the Consumer space - Silvano Fashion lost 13.7% and Novaturas 8.2%, while other worst performers - ESO and Ignitis gamyba fell as their shares traded ex-dividends. In May, life of Novaturas shareholders continued to be nerve wrecking: stock was pushed up from EUR 2.08 to EUR 2.98 (gaining 43% in less than a month!) just to be hammered back down to EUR 2 in the last days of May as someone from LHV sold a huge block of shares in the open market. Soon, we might hear of changes in the Novaturas’ shareholder structure.

As we enter the summer, lockdown restrictions are being gradually eased across Europe and businesses try to return to the “new normality”. But will the reopening of economies be enough for companies to recover and justify newly raised hopes of investors?

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