SOFIX Has The Highest P/E Among Indexes in Developing EU Countries

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SOFIX Has The Highest P/E Among Indexes in Developing EU Countries

The decline that Bulgarian indexes started at the end of 2007 and continued in the first months of this year has been described by analysts as “having a sobering effecr” while investors are calling it “illogical”.

Who should we believe? We should probably listen to analysts, as this is their job and they are supposed know what they are talking about, although history has seen a lot of cases when analysts turned out to be wrong.

After Bulgaria's accession to the EU, the correlation between the local capital market and the foreign ones (especially those in the EU) has increased significantly.

Due to the lower stage of development of the local stock market, as well as to its size and its relatively low efficiency compared with EU markets, Bulgarian indexes advanced at a much faster pace than the other indexes in the EU.

This caused concerns about a possible bubbling in stock prices, which together with the global financial crisis and foreign investors' withdrawal from developing markets, quite logically lead to the correction we are witnessing now.

Whether this correction is too deep is also a subject of discussion. That is why we decided to compare it with other EU markets.

We have to bear in mind though, that Bulgarian indexes ended the past year on positive territory and that their annual advance was much higher than that of indexes in most countries in the region. This may be explained with the specificities of our market, such as its very high volatility.

The blue chips index SOFIX has lost some 32.4% so far this year, which is the biggest fall in the region. Turkey's index is close behind, with a decline of 31.2%, and those in Croatia and Romania have lost 28% and 25.2% respectively.

In other words, SOFIX's loss is comparable to that of other indexes in the region. The number one question for investors is which country has the relatively cheaper market?

The answer would also to a large extent answer the question which market has the most growth potential?

As you can see from the following chart, we may call SOFIX the most expensive index in the region, based on P/E ratios (the only exception is Serbia, which is not a EU member).

CountryP/EYear-to-dateIndex
Romania13,68-25,20%BET
Serbia19,97-19,60%Belex 15
Russia13,28-3,30%MICEX
Croatia14-28,00%CROBEX
Turkey9,39-31,20%ISE 100
Czech Republc12,5-12,70%PX
Poland12,1-22,70%WIG 20
Hungary8,52-18,90%BUX
Bulgaria17,18-32,40%SOFIX

*Source: Karoll Investment Intermediary

The P/E ratio of SOFIX's stocks stands at 17.18, according to the Bulgarian Stock Exchange. The ratio of the corresponding index in Romania (where the market experiences difficulties similar to those in Bulgaria) is at just 13.68, based on data provided by Karoll Investment Intermediary.

The ratio is also lower in the Czech Republic, Poland and Hungary, at respectively, 12.5, 12.1 and 8.5. Some investors may be surprised that the economies of such countries, considered to be more developed than Bulgaria, are growing at a slower pace.

We must not forget, however, that foreign investors are looking not juts for growth, but for liquidity as well. For them it is very important to able to enter and exit an investment fast.

Turkey's blue chips index has the lowest P/E ratio among developing countries outside the EU. It is at 9.39 and is attributed to the political and currency tensions in the country.

The Russian index also has a relatively low P/E ratio (13.28). We have to note that the Russian market is the best performing one in the CEE region. The MICEX index has lost just 3.3 % this year.

This article is analytical. This is not a recommendation to buy/sell stock.

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