With the presidential elections creating political insecurity in Ukraine, foreign investors are taking a wait-and-see approach to investing their money in the country.
Activity on Ukraine’s stock market, typically popular with Western portfolio investors, has slowed in the past several days.
Having fluctuated earlier this year between $500,000 and highs of $2 million, daily trading volumes on the nation’s stock market are down by about two thirds.
Foyil Securities strategist Volodymyr Dinul said that during the first two days of November, trading volume averaged $100,000.
“The market is slightly weaker, but there is no sell-off for now,” said Dmytro Tarabakin, director of Kyiv’s Dragon Capital brokerage house.
“If everything remains calm, the market will easily rebound, but there could be a negative result on the market if the political situation worsens.”
Scenarios in which the elections are canceled due to violations and large opposition protests could induce Western investors to sell Ukrainian stocks, Tarabakin added.
Ukraine’s blue chip stocks surged earlier this year, a sign that Western portfolio investors were gaining confidence in the nation’s lackluster stock market. Activity later tapered off, only to jump up a bit last week ahead of the Oct. 31 first-round presidential vote, as investors betting that stocks would rise after the balloting beefed up their activity on the market.
“We witnessed some increased interest by foreign investors in Ukrainian stocks in the last week before the elections,” Foyil’s Dinul said. “In our opinion, investors were betting on a Yushchenko victory.”
“The Ukrainian stock market is very cheap, and therefore, by buying Ukrainian stocks before the elections, investors, in essence, were buying an option: It may expire worthless – a Yanukovych victory – or it may provide a very good return in case of a Yushchenko victory.”
Placing bets
If Yanukovych is elected, investors are not expecting any major positive developments for Ukraine’s securities market in the short term, Dinul said.
“Ukraine’s stock exchange will remain where it is,” Dinul said, adding that existing corporate governance problems will likely persist.
“We expect that a Yushchenko victory would give the Ukrainian stock market a boost and we will see an accelerated development of this market. Yushchenko seems to be serious about enforcing the rule of law. This also may lead to the elevation of new stocks, an increase in free floats and stock market liquidity,” Dinul said.
“If Yanukovych wins, we would expect about a 10 percent to twenty percent increase in the stock market’s capitalization by the end of 2005. In the case of a Yushchenko victory, we would expect Ukraine’s stock market capitalization to at least double by the end of 2005,” Dinul added.
Analysts say that foreign investor demand has been driving the market’s impressive growth since the beginning of the year.
Strong performers this year include fixed-line telephone monopoly Ukrtelecom, the market’s leading company by market capitalization (more than $2 billion); oil-drilling company Ukrnafta, the second largest by market capitalization; several energy generators; chemical company Stirol; and Nyzhnyodniprovsky Pipe Plant.
Despite the recent rally, Ukrainian blue chips are still trading for less than their Russian counterparts. Earlier this year, analysts predicted a temporary drop in investor confidence as a result of the presidential elections.
On hold
Uncertainty connected with the elections has temporarily put off strategic investors involved in big projects, too.
“In general, most of the clients we are working with are suspending investment decisions on a tactical level,” said Andriy Boyechko, a partner at Capital Strategy, a company that develops project strategies for businesses.
The slow-down began two weeks prior to the presidential elections, he said, and is likely to end about a week after them.
“However, the uncertainty does not affect strategic investment plans. People who have decided to conduct business in Ukraine are not renouncing their plans; they merely froze a little.”
“They mostly fear some sort of open conflict, such as civil war. Basically, it doesn’t matter to them which candidate wins.”
Oleksandr Pylypenko, director of corporate rights and investments at Donbass Industrial Union, said the elections have not influenced the economy’s high growth rate. The worst scenario for businesses would be negative world reaction to the presidential elections, he said. But he added that “business remains hopeful under any circumstances.”
American Chamber of Commerce in Ukraine President Jorge Zukoski said he’s unaware that AmCham members feel that divestment from or less investment in Ukraine is necessary. The country’s success in attracting investment, he said, will be a function of its new government’s ability to create a level playing field and transparent conditions for domestic and foreign investment.
If the government cannot do these things, “the money will go elsewhere,” he said.
AmCham has seen more investor interest in the last two years than in its previous 12 years of activity in Ukraine, Zukoski said. He said AmCham communicates with the current government and will do so with the future government, offering advice and expertise.
“Our members who are already invested into Ukraine are continuing to invest more into their employees and infrastructure as they see a bright future for Ukraine.”
Different companies, however, have different levels of tolerance for political risk. Some “will wait on the fence a bit longer to see how the situation works itself out,” Zukoski said. But others, he said, are informing AmCham that they see good future investment opportunities and are looking forward to doing business in Ukraine once the fog around the election clears.
