In this post I would like to refer to a recent statement made in Bucharest by a Director of Amundi, the leading financial assets manager in Europe. According to press reports, he declared that doing away with the private pensions Pillar II „would be a very good thing for foreign institutional investors. The Bucharest Stock Exchange is likely to fall into a pitiful state with a complete reshuffle of market players, but under no circumstances will there be 50% drops. Institutional investors will definitely turn up to buy.”

I believe that I should make some explanatory comments on these statements. The Bucharest Stock Exchange is likely to fall into a pitiful state, but not because of the player reshuffle. The presence of foreign investors on the stock exchange is meant to increase its clout and that is something to look forward to. A scenario where pension funds have to sell off the assets would indeed require the existence of counterparties of equal or higher financial might. They can only be foreign investment funds. So, yes, the assumption is correct, the assets held by the Romanian private pension funds i.e. by domestic capital, would see their ownership transferred in the hands of foreign investors. It is something we should bear in mind especially as the over reliance of Romanian businesses on foreign capital is a recurrent and controversial topic.

On the other hand, if the Bucharest Stock Exchange is likely to fall into a pitiful state it will be because of market dips. Informed investors are well aware of the fact that, under any scenario, forced selling is an opportunity that all those which are on the buy side will push hard to take advantage of. The prices offered will be significantly lower than in normal trading conditions, because sellers do not have any other choice but to get rid of their holdings.

But on top of the above there is still another element on our stock market that would cause the prices to plunge further: the liquidity risk. Romanian pension funds are long-term investors whose strategy is rather to „buy and hold”. That is why, a lack of liquidity on the local stock market is easier to withstand as adjusting exposures on the short-term is not an imperative and can be phased in, even by using new money coming monthly in the funds.

For foreign institutional investors, however, the liquidity risk carries significantly more weight, being more often than not the reason why many of them have avoided Romania in the past. The time it would take them to sell their portfolio of Romanian stocks in the event of a last notice exit with every day bringing lower prices, is much too long. In that scenario the way that the brave enough investors will try and minimize losses would be to offer a price low enough to offset possible losses caused by protracted selling. So yes, it could be disastrous for the Bucharest stock exchange. But, let us move on…

„ But under no circumstances will there be 50% drops”. Hmm, should that comfort us? Are prices falling by “only” 30% not a reason of concern? I strongly doubt that that would make anyone layback and relax. Romanian private pension funds have around EUR 1.5 bn worth of investments on the local stock exchange. A 30% dip would see half a billion in around 7 million people`s pension money wiped out.

The implications, however, will be more far-reaching to even affect most of the hosts of Amundi`s CEO at the Association of Fund Managers Conference. A possible dramatic adjustment in stock market prices would adversely impact all investment funds holding Romanian stocks. Investment funds based in Romania, in particular. That means that not only the savings of those contributing to Pillar II would be hit, but also of those who decided to make additional savings by putting their money into investment funds with stocks exposure, irrespective of whether they are Pillar II contributors or not.

To conclude, the existence of foreign institutional investors set to buy Romanian pension funds stock, should they be sold, only looks like good news. The real bad news is that prices will have to be low enough to make them buy in the first place, triggering significant losses for the Pillar II participants.

Deal?

Have a good weekend!

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