28 Ianuarie 2010
Five things every leader should know about the stock market
The stock market crash of 2008 heralded a global economic collapse and business calamities. Under the best of circumstances, Romanian execs have understood the purpose the stock market serves and the role it plays in the economy at large and started to take into account the market movements and brokers’ suggestions.
The stock market is a source of capital
Mihail Ion (photo), chairman of Raiffeisen Asset Management, shares his views from the standpoint of an institutional investor with funds under management holding minority equity stakes in public companies that can yield profit from the growth of market value and dividends/bond coupons without being involved in the way the company is managed.
Equity offering brings immediate proceeds to the company, which can be used for growth and expansion, retiring existing debt and improving financial indicators for favorable financing terms.
“A possible sale of the entire business is much easier for a public company. The only disadvantage consists in the fact that the holding in the company is diluted, and hence the impact of the development on equity offering must be assessed so as the growth of the company’s potential to offset the dilution of the capital”, said Ion.
However, an equity offering doesn’t bring proceeds without an opportunity cost, as shareholders expect a rate of return comparable to the risk level. The cost of capital is therefore higher than bond interests or bank loans.
On the other hand, bond offering is an alternative to borrowing from a bank on a long term, and could be the source of choice for raising capital especially now, when lenders are more cautious when granting loans.
Stock markets force you to become an informed investor
He remembers some of the statements given by Romanian businesspeople who engaged in magical thinking and tried to convince themselves that their business was solid, but the economic crisis proved the opposite.
“In the Romanian market, it was enough to have some cash and courage and you would easily become a «manager». It’s enough to look at the real estate market in 2006-2007. Before, local execs were not familiar with financial earthquakes of this magnitude.” the broker added.
But what if a severe currency crisis had erupted in Central and Eastern Europe? Many emerging countries have experienced such currency bubbles over the past 15 years, crisis that pushed local currencies 40-50% lower.
On the other hand, how would such a crisis reflect over an entrepreneur’s balance in the event of a high indebtedness degree in a convertible currency? No matter how high the turnover or profit may be, it is impossible to cope with such a financial shock without major footprints on the balance, Lupsan continued.
Stock markets herald economic trends
Adi Lupsan tells Wall-Street how in 2006 he met a non-resident player specialized in real estate industry. When he came in Romania, he opened an account at the stock market. Out of curiosity, the broker asked why he opted for BSE since the local real estate market offers higher returns.
“The stock market can provide a picture of the economic trends. And the access to cash flow is much easier. But above all, it forces me to become an informed investor about what happens with your economy”, the reply came.
Gabriel Necula (photo) says the performance of the stock market will always herald the economic trends, however developed it may be.
“This aspect should be known and understood by all executives of both large and small companies. Keeping a close eye on cash flow movement would definitely help them in the decision-making process”, Intercapital broker said.
Sector market performance influences the business
“Knowing investors’ expectations on the market sector is very important in the decision-making process. If an entrepreneur is not familiar with what investors expect, he will most likely make important decisions that can lead to major losses”, says Gabriel Necula.
Ovidiu Fer (photo), analyst at the Czech investment company Wood&Company says the manager of a company should know the situation of his company or of the market sector better than a broker.
Equity offering brings visibility, transparency and valuable partners
“By going public, a company can gain additional exposure and become better known. It can also be considered a quality certificate, since the financial condition of a public company is subject to the scrutiny of the NSC standards, and considering the strict criteria companies must satisfy before going public. Transparency is also a major advantage in terms of the relation with suppliers, customers and lenders”, said Mihail Ion.