The Collapse of Global Stock Markets and the Open Investment Fund Industry Pressures the Domestic Capital Market

After a new major flood on global stock markets, most analysts believe it is unlikely that the Zagreb Stock Exchange will avoid a new sharp correction in stock prices.

A survey by Hina shows that out of nine analysts from brokerage firms, six expect a decline in the Crobex index today, two expect its growth, and one expects stagnation. The Crobex fell 7.59 percent yesterday, marking its largest daily percentage loss since August 2003. It closed the day at 2,461 points, its lowest level since May 2006.

“After the major flood and extremely negative sentiment on American and Asian stock markets, a similar situation can be expected today on the domestic market. There is a crisis and panic on global stock markets, and this is reflected in our stock exchange,” says Dalibor Balgač, an investment advisor at Abacus brokers.

Yesterday’s sharp decline in stock prices on Wall Street, despite announcements of new measures by the U.S. Treasury to rescue the financial sector, which would even allow for state purchases of bank shares, has spread this morning to all global stock markets. The Dow Jones index plummeted 7.3 percent to 8,579 points, its lowest level since May 2003. The S&P index fell 7.62 percent to 909 points, while the Nasdaq index lost 5.47 percent, diving to 1,645 points. Both the Nasdaq and S&P indices have fallen to their lowest levels in five years.

In Asian markets, leading indices sharply declined this morning, with the Nikkei index in Tokyo dropping more than 9 percent. Since the beginning of the week, it has plummeted more than 20 percent. The MSCI index of Asian stocks, excluding Japan, is down more than 5 percent and is at its lowest levels since June 2005. The panic prevailing on the markets is also shown by the VIX index of the Chicago Board Options Exchange, known as the ‘fear index’, which reached a new all-time high yesterday – 64.9 points.

Investors are most concerned that neither the reduction of interest rates by central banks worldwide, nor the injection of billions of dollars and euros into the money market, nor all other attempts by financial authorities are succeeding in reviving the credit market. The interbank credit market simply does not respond to the actions of central banks. Fearing hidden losses on balance sheets, banks are unwilling to lend to each other, effectively paralyzing the interbank market, which complicates lending to companies and citizens and increases the cost of money.

“We will only be able to glimpse recovery after the tension and distrust in the interbank market ease, and when long-term interest rates on interbank loans begin to fall,” explains Balgač. The stagnation in interbank lending leads to a decline in production and consumption among the population, rising money costs, and all of this leads to recession, which has a devastating effect on the stock markets.

“The U.S. and Europe are definitely on the brink or are already in recession. However, we will see what the fate of the global economy is. The IMF has estimated global economic growth at 3.0 percent for the next year. The domestic economy is slowing down, but our companies are not as threatened as one might conclude from the decline in their stock prices,” says Balgač.

The risk to the domestic capital market now also comes from the open investment fund industry. The latest data from the Croatian Financial Services Supervisory Agency (Hanfa) shows that in September, the net assets of open investment funds with public offerings decreased by 15.83 percent to 14.18 billion kuna.

In the U.S., a record capital was withdrawn from open investment funds during September, amounting to about 70 billion dollars. This is a common trend in a crisis, says Balgač. “For several months now, there has been talk of consolidation in the domestic fund industry. This will now accelerate, and funds will merge, but those that cannot withstand the pressure of the crisis will likely disappear from the market,” assesses Balgač.

He does not believe that the state will intervene. “The state has no business in the capital market, nor does it have the instruments to inject the necessary capital. Pressured by problems due to the outflow of investors and money, funds have no choice but to negotiate bridge financing with banks, which some funds are already doing. The crisis has reached its peak, and everything depends on what small investors will do in the next few days,” says Balgač.

In such conditions, it is expected that most of the money that flows on October 17 to the accounts of small investors from the sale of shares of INA to the Hungarian MOL will be transferred to safe havens, such as savings deposits.

“Everything depends on each investor’s individual risk appetite. Those less inclined to risk will likely deposit their money in banks and wait for the situation to calm down. Others will seek excellent opportunities that arise in such crises when stocks are significantly undervalued. Their focus will be on companies with strong fundamentals and large cash positions, those that pay high dividends, and defensive sectors, such as food and energy,” assesses Balgač. When sentiment improves on global stock markets, we will witness an improvement in sentiment on the domestic stock exchange as well, concludes Balgač. (H)