March 2020 Newsletter: "March of COVID-19"

Updated: Jun 11, 2020

We have finished 1st quarter of year 2020 and entered into brighter (at least measuring by daylight hours) April. Now it’s time to look back and see what last month has brought for investors on the Baltic Stock market. Unfortunately, market’s flagship index (OMX Baltic Benchmark GI) continued the fall it started in the last week of February and declined by another 19.99% in March, which compares with a 12.51% decline in USA market (S&P 500 Index) and a 14.79% drop in Europe (STOXX 600 Index). It is worth mentioning, however, that in USA and Europe investors resumed shopping around last week and bought up beaten down stocks, thus lifting S&P 500 index by 17.92% from its lowest point. Sadly, no loud bulls echo could be heard on the Baltic market, which managed to recapture just 3.3% from its lowest point. Poor performance of Baltic Benchmark Index was caused by heavy sell-off of Tallink and Siauliu Bank stocks. As those companies are heavyweights in the index and have displayed some of the worst performances with a -30.57% and -28.75% drop respectively, their decline has dragged down the overall market performance.

Figure 1. OMX Baltic Benchmark GI Index 01.01.2000 - 31.03.2020

Source: NASDAQ Baltic

We assume that the market could go further down due to the following factors:

  1. Q1’20 reporting season will kick-off soon and newly reported financial results are likely to inflict more pressure on investors as the new reality paradigm sets in;

  2. shallow liquidity and subdued turnover, which enable small trades to cause relatively big price movements (as was witnessed on Monday, when few big Baltic stocks were falling on smaller than usual turnover this year, e.g., Tallinna Sadam Tallink and Siauliu Bank).

Figure 2. OMX Baltic Benchmark GI Index Quarterly Performance 01.01.2000 - 31.03.2020

Source: Alphinox, Thomson Reuters

From fundamental analysis viewpoint, current market valuation looks very attractive (P/E of 8.51 and P/B of 0.94, last time valuation that low was witnessed in the end of 2009, when market started to recover from the financial crisis), but it must be taken in account that those numbers are based on past financial data and hence do not account for COVID-19 impact on business operations just yet (similar story can also be told about dividend yield chasers who are now in a quite difficult position, given that many companies are either slashing or are planning on slashing dividends this year, but their current dividend yield still looks appealing as it is based on last year’s payout). Now, when companies are to report Q1 & Q2 results, we will already be able to see COVID impact on earnings and assess the depth of the decline. If earnings drop by ~30% but stock prices (which have already dropped by ~30%) stay at current levels, we might witness P/E returning to the previous ‘’pre-COVID’’ level of 12x. In our opinion, in these times dominated by uncertainty, it would be a rather high premium to pay for.

Baltic Main List stock companies performance

Things were moving fast during last 40 days or so and so were stock prices. Just like in the last week of February, also for month of March the prevailing color for stock price movements was red. The exceptions were both Lithuanian utility sector companies that managed to finish last month in green – Energijos Skirstymo Operatorius and Ignitis gamyba, whose minority shareholder lawsuit with Lithuanian state-owned Ignitis has come to an end, whereby a settlement was reached and a decision to offer more favorable terms for minority investors was made.

Figure 3. Baltic Stock market companies & world indices performance as of 31.03.2020

Source: Alphinox, Thomson Reuters

The biggest loser in March was Pro Kapital Grupp that lost as much as 38.74% - not only company faces COVID-19 pressure, but it has also posted a net loss for FY 2019 due to struggles with a ‘’crown jewel’’ T1 Shopping Mall. Business of 2nd largest decliner- Apranga- is also connected with shopping malls and company’s share price has dived 34.69% as 1) Lithuanian & Estonian governments have closed all shops except those with first necessities (in 2019, APG had 59% of revenues in LT, 16.6% in EE); 2) Government of Latvia closed shopping malls on weekends (generates 23.9% of sales in LV), but even on workdays people in general are staying away from public places. 3rd largest decliner was Tallink with a slump of 30.57% as almost all passenger transportation is halted (in 2019, revenues from onboard restaurant & shops sales were 59%, Ticket sales -23% of revenues).

Also, if we compare overall Baltic market performance with leading world indices, Baltic market has underperformed peers in all of the following time periods – 1 Week, 1 Month, 6 Month, 1 Year, 3 Years & since the market peak on February, with exception of Year-to-Date.

In the end we must say that, although everybody around now is talking about recession/bear market/depression (chose one narrative fitting your mood best), some might feel opportunistic and assume that it’s a good time to be greedy as others are fearful. In our opinion, however, it can turn out to be a risky step as magnitude of this decline might eventually be much deeper than the rabbit hole of ‘’Alice in the Wonderland’’.


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