Demystifying Romania

Mark Mobius, Ph D.
Executive Chairman
Templeton Asset Management Ltd.

Investors often closely identify the frontier markets asset class with countries in the Middle East and North Africa, as reflected by their dominance in benchmarks such as the MSCI Frontier Markets Index. As a consequence, eastern European frontier markets such as Ukraine and Romania are often overlooked, but we think they offer exciting investment opportunities. These countries are transforming their economies from state-dominated socialist/communist economic models to those driven by market forces, private enterprise and increasing privatization.

Romania joined the European Union (EU) in 2007, and it is currently undergoing substantial reforms that we think should strengthen the country's capital markets. But, like other eastern European countries, Romania was hit hard by the global financial crisis and needed a rescue package. The EU's €20 billion financial package for Romania helped underpin the country's markets and eased pressure on the Romanian currency, the leu. The aid package also gave the country some breathing space by allowing the government to run a budget deficit barely below last year's, which was 5.2% of gross domestic product (GDP). The government envisages cutting spending by roughly 1% of GDP this year. In addition, a number of reforms that should put the country on the right track were tied to the package.

Infrastructure development is one of the key designated areas that can be financed with EU funds, which makes this sector particularly interesting for investors. In our view, a great deal of work needs to be done to build infrastructure, so companies in the construction and construction supplies industries could provide potentially attractive investment opportunities. In the electric energy sector, we think the prospects for growth are substantial, given growing demand for electric power.

Foreign capital flows in and out of Romania's small market had an impact, especially during the last few years. The percentage of non-resident buyers into the Bucharest Stock Exchange jumped to 40% in 2007, but then it dropped to approximately 23% in 2009 (see Table 1). Correspondingly, the MSCI Romania Index fell sharply from highs in 2007 and early 2008 to lows in late 2008 and 2009. From exaggerated optimism, some investors turned to extreme pessimism. However, it is important to note that non-resident investors still constitute a minority percentage of the market.

At Templeton, we evaluate companies with a longer-term, five-year investment horizon, but more importantly, we learn to be patient and not panic when there is a lot of short-term noise. Foreign investors can sometimes develop misperceptions about Romania and other frontier markets from what they read. In our opinion, it is important to get beyond initial impressions and understand what is really happening on the ground. We see tremendous opportunities for growth and investments in Romania, and are looking forward to expanding our operations there.

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