Fall before takeoff
American mortgage market crisis seriously affected stock markets of the USA and Western Europe countries. At the moment one can maintain that this event was caused by the Federal Reserve System, which in 2001 considerably reduced the price of borrowing in dollars. Low credit rates started the «real estate» boom, which led to the significant growth in profits of financial institutions, especially banks, involved in mortgage lending.Consequently from 2002 to 2005 the prices of their stocks were growing steadily. The situation began to change in 2006 when the trend of borrowing price growth both in US dollars and in Euro created unfavourable conditions for the mortgage holders. As a result the mortgage credit excess induced the financial crisis, affecting primarily those banking institutions, which had actively credited or purchased mortgage notes and certificates. Mature stock markets began shaking with fever. Lots of investors started to dispose of banking and financial sector stocks. On the one hand, securities of such companies as Countrywide Financial Corporation, Ford Motor Credit Company, Merrill Lynch & Co., Inc. Citigroup Inc., became the most traded stocks. And the least stable in terms of price dynamics, on the other hand. The stocks of European banks were in a similar situation. As a result it is the price fluctuation of these securities that has recently caused significant changes in the index dynamics of the world leading stock exchanges.
In the Ukrainian market mortgage lending began growing only in 2005. Earlier this segment of lending was practically non-existent. However, despite the success of this market in 2006 and January-September 2007, the share of mortgage loans in the Ukrainian monetary aggregates structure remains minor. Perhaps, it was the reason why the negative trends in the world stock markets did not seriously impact Ukrainian banks, and their stocks suffered the mortgage crisis less. Stocks of such financial institutions as «Raiffeisen Bank Aval», Ukrsotsbank, Ukrgasbank, «Forum» bank continue to be actively traded at the First Stock Trading System (FSTS).
The price change dynamics of the stocks of domestic banks at the end of 2007 – beginning of 2008 demonstrated that their market value was mostly affected not by negative news from foreign stock markets but by the internal Ukrainian factors. In particular, new stock issues, information of selling this or that bank to a foreign investor, etc. The fact, that Ukrainian banks performance last year clearly showed a positive tendency of the country banking system development on the whole, is important. In my opinion, the market value of the stocks of Ukrainian banks will be growing further along with the positive tendency of banking profit growth. However, the bank stock prices will depend on overall demand for securities of domestic businesses. And the latter are not as active as the market requires.
The analysis of the situation in the Ukrainian and world stock markets in 2007 enables to make a conclusion that their interrelation has been intensifying. The dynamics correlation ratio of the FSTS stock index and S&P index for this period was 0,68, which was the evidence of their direct relation. Despite the low level of capitalization in comparison with stock exchanges of the developed countries, the FSTS market represents practically all the sectors of the economy, and the stocks of Ukrainian issuers are in stable demand of non-residents. They are also full representatives of the equity market of the developing countries. Herewith, the Ukrainian stock market, unlike the Russian one, has a specific structure and its niche in the segment of the developing countries. This statement is based on the correlation ratio of the FSTS and Russian Trading System indexes in 2007. It showed rather weak interrelation of the two indexes — 0,4 only. Thus, the difference between the Ukrainian and Russian stock market structures is apparent. The Russian market essential stocks are those of oil and gas companies, while there are no leaders in the Ukrainian market — stocks of many companies are popular. Therefore, during last three-four months the dynamics of market value growth of stocks in the Ukrainian market has not always been synchronic with the dynamics on the Russian one. Affected by the overall negative trend in the world stock markets, the Ukrainian market underwent the price reduction adjustment in early autumn 2007 and fixed their considerable fall in early 2008. This situation mostly reflected the world trend related to the mortgage crisis consequences. At the same time the dynamics of bank stock quotations have been well balanced. The decline in the market value of securities issued by certain banks always corresponds with their growth after stabilization of the domestic stock market. The bank stocks have turned out to be one of the most sensitive financial instruments for assessing the situation in the stock market.
Further prospects of the Ukrainian stock market development will be seriously influenced by the situation on the world stock markets. The mortgage crisis consequences have not been overcome yet. In the USA the volume of the mortgaged property for sale continues increasing and there already are ideas of its centralized buy-out by the state. The performance of the leading American and European banks show that their earnings have decreased significantly due to mortgage losses. As a result, the investors’ interest in the equity market worldwide has remarkably fallen. The recent galloping growth of oil and gold prices confirms, that a significant part of funds has been directed to the commodity and precious metals markets. Besides, the FRS policy of rate reduction has nearly exhausted its regulating power, as its further decrease slightly influences the cost of funds in the market. Rates of major world currencies — US Dollar and Euro — are considerably fluctuating. This fact is also unfavorably affecting the stock market development, as the currency risks for investors are rising.
Considering the impact of the aforesaid factors in the Ukrainian equity market in 1Q2008, there may appear negative trends. It is possible that bank stocks will keep on cheapening on the background of overall decline in securities value of domestic companies. Some stocks can fall significantly. However, due to the diversification of market segments and increase in the capitalization of issuers this year overall dynamics of price growth will probably be positive. Most Ukrainian securities have a very high growth potential to reach their fair price. And taking into account the price fall at the beginning of the year the upside will be even higher.
It is expected that part of funds from the stock markets of the developed countries may be transferred to the markets of emerging countries as a result of natural capital cross-flow. Undoubtedly, negative factors of the world stock market may slow down the growth of internal stock sales operations but the strategic forecast of the domestic equity market potential remains unchanged — its securities will be in high demand of investors from emerging, CIS and Eastern Europe countries.
Vasyl Gorbal
Member of the National Bank of Ukraine Board,
People’s Deputy
of the Parliament of Ukraine
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