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Harold S. Geneen

Investment in Bulgaria

2011 Jun 29


Starting from the very beginning I will try to make clear why I am bullish about investing Bulgarian stock market. At first I would suggest to look at the chart below.


Five year Bulgarian stock market index (SOFIX – in orange color) and Central – Eastern –Southern Europe stock market index (NTX – in green color)

Source: Bloomberg


What I wanted to say by this chart? It is obvious. The green color chart shows that after the crash in 2008 stock markets of Emerging Europe (this index does not include Russia, investments in which are dependent on prices of resources) fairly rebounded and are in similar level that was before five years. But not the Bulgaria. Bulgarian stock market is still more than 50% below compared to level that was five years ago and it has rebounded not very significantly even from the very bottom during financial turmoil of 2008-2009.


What can it mean, and how can it be? We will try to answer these questions. But such a graph already gives us a presumption that investments in Bulgaria can be undervalued. 



Economical Situation of Bulgaria 


Is it situation in Bulgaria really that bad or is stock market situation highly exaggerated? The first thing what is important in current world when looking for investment market is a condition of country’s public finances. And Bulgaria looks amazing. Please follow the tables:


General government gross debt - % of GDP

  2008 2009 2010
Bulgaria 13.7 14.6 16.2
Greece 110.7 127.1 142.8
Portugal 71.6 83.0 93.0
Euro area (16 countries) 70.0 79.4 85.3
EU(27 countries)  62.3 74.4 80.0

Source: Eurostat


General government deficit/surplus - % of GDP

  2008    2009    2010
Bulgaria 1.7 -4.7 -3.2
Greece -9.8 -15.4 -10.5
Portugal -3.5 -10.1 -9.1
Euro area (16 countries) -2.0 -6.3 -6.0
EU(27 countries) -2.4 -6.8 -6.4

Source: Eurostat

The both ratios: government debt and government budget deficit of Bulgaria looks impressively good compared to whole Europe (as well as the all world) and I would think that Bulgaria’s public finances situation is the best in Europe after Estonia.


Public finance do not have effect to boost stock markets instantly, but it has a lot influence over long term and promises some safety for economy. If the country’s public finances are very bad, it would be big threat for investments in the country, because sooner or later it should turn in tax increases and stimulus decreases, which would cause negative impact for growth of the economy. So, Bulgaria has the advantage over the other countries to keep current tax rates when others countries will have to increase it and attract more investors.


The most recent economical indicators are also promising. According to National Statistics of Bulgaria GDP growth rate in the first quarter of 2011 is 0.6% compared with the fourth quarter of 2010 and 3.4% compared with the same quarter of the previous year. Industrial Production Index rose by 9.4% as compared to the same month of 2010. Trade balance also has improved significantly and looks quite healthy.


Retail and constructions are still lagging in the country. Construction Production Index fell 22.8% in April compared to the same month of the previous year.  Retail trade in April rose 0.5% compared to the same month of the previous year. It is needed to say here, that constructions are highly dependable on tourism and international investors. International investors lost confidence in everything what is near to Greece. 


The problem is that Bulgaria has a border with Greece. Still economically Bulgaria is not very dependant from Greece: in last quarter export to Greece constituted only 6.6% and import only 6.1%. Those are not very significant numbers even if economy of Greece will stagnate for decades. 


What causes more threat is not the economical relation but a financial. Four banks in top 10 of Bulgaria are Greece’s capital (the third, the fifth, the seventh and the tenth by ranking). Those Greek banks play significant role in country’s financial system but still do not dominate over it. However, if Greece financial system would collapse, many countries would suffer this as well as Bulgaria, so there is no reason to devaluate Bulgarian stocks so strong as they are devalued now compared to the others. 




Main Sectors and Valuations of Bulgarian Stock Market


The most promising is the valuation of the companies. Bulgarian stock market does not characterize by high liquidity but still is rich by variety of listed companies compared to other small emerging markets. I will not go through all of them, but like to distinguish few sectors. Bulgarian stock market is rich in financials, holdings, REITs and engineering. I will to list a few examples of each sector.


Company     Sector    P/E ratio*     P/B ratio*   
 CB Central Cooperative Bank AD  Finance 4.1 0.4
 CB Corporate Commercial Bank AD  Finance 6.5 1.3
 First Investment Bank AD  Finance 11.5 0.8
 Chimimport AD  Financial holding 3.2 0.4
 Synergon Holding AD  Holding 5.6 0.1
 Industrial Holding Bulgaria  Holding 16.8 0.2
 Bulgarian Real Estate Fund REIT  REIT 33.0 0.5
 ELARG Agricultural Land Opportunity Fund REIT    Agriculture REIT  - 0.6
 Fund Estates REIT  REIT - 0.1
 Elhim Iskra AD  Engineering 9.9 1.2
 M+S Hydraulic AD  Engineering 9.5 2.1

 * Source of P/E and P/B ratios is Bulgarian Stock Exchange


Of course few market ratios out of the context cannot point out whether good or bad investment that is. But keeping in mind, that country gets up from a recession (profits are depressed) those valuations show the general pricing of the stock market, and to my opinion, it is cheap.




Possibilities and Threats of Investment in Bulgaria


Bulgarian market does not contain such strong political risks as investment in Africa or investment in Russia does. Bulgaria is a member of EU and is a strong factor of political safety. Also an advantage is a stable currency - lev, which is pledged to the euro.


Cheap valuations and slow recovery from the recession show Bulgarian market as an attractive one for investing. The country is still very poor compared to other EU countries and a long term growth can be expected to reach at least Southern Europe economical level over few decades. 



In short term the biggest threats come from Greece and other problematic Europe countries, though Bulgarian economy by itself looks healthy and strong. 


As to my knowledge there are no ETFs of Bulgarian stock market, so it is harder to reach. But if you are serious to invest in Bulgaria you can do that investing directly in stocks through several local brokers as Karoll or FFBH, or some bigger international investment banks. 


Don’t forget that investment in emerging markets as Bulgaria is always very risky.



Rokas Lukosius - investing book author


* Disclaimer: an author of the article might have been invested in stocks/assets that are mentioned on the article directly or indirectly. 


Other articles you may like:

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