Modest Sudnius. Our capital market in a global context

Although the last two years have been difficult for the capital market and the companies that use it, the dynamics have not slowed down.

Corporate bond issuers contributed the most to this. Judging by stock exchange data, a quarter of the approximately 100 bonds currently operating in the Baltic States were issued in 2023. In addition, during these bond issues, the companies of the Baltic countries attracted about 400 million. euros.

From an investor’s perspective, the past year has been interesting not only because of the high number of bond issuances, but also because of the attractive interest rates. All 2023 the average interest rate of bond issues was about 10.5 percent, i.e. 2-4 percent on average. higher than in previous years.

In addition, according to the assessments of various market participants, these interest rates in the Baltic countries are as much as 3-4 percent. higher compared to the interest rates offered in the Western European bond markets last year.

I can tell you from experience how effective it is to issue bond issues at the right time and place. Last year, Eleving Group spent 50 million. EUR bond issue, which was one of the largest in the Baltic States and attracted more than 2,000 new (including small) investors.

Estonian investors were especially active, accounting for almost 80 percent. of all new bondholders. Considering the fact that there were fewer Latvian and Lithuanian investors and they were less active, it shows that the capital market of the Baltic countries has a huge untapped potential.

In addition, a number of Baltic bonds will expire this year, so it is likely that some companies will decide to refinance them. Market activity and the opportunity for investors to add to their portfolios will undoubtedly continue this year.

It is realistic that such high interest rates will not last long and will return to 6-9% in the future. interval. However, for the time being, Baltic companies continue to offer local investors relatively high-quality and high-yield investment opportunities.

The stock markets of the Baltic countries were somewhat calmer last year. While the Baltic index has risen by nearly 58 percent over the past five years, most of that growth has occurred in the first nine months of 2021. months.

Theoretically, the average annual return is about 11.5 percent. that is, even higher than what can be earned from bonds, but in the last two years it has slowed down significantly and we can no longer say that there is an obvious growth.

Investors who have invested in shares of the Baltic countries until 2021 in the second quarter, are currently still enjoying positive growth, while those who invested after 2022 are likely to be quite negative.

Meanwhile, the S&P 500 index, although in 2022 and experienced 20 percent fall in value, recovered and currently shows 88 percent. growth over a five-year period, ie about 17.6 percent. per year.

While the S&P 500 and the Baltic stock market indices have felt similar impacts from the pandemic, inflation, geopolitics and the end of the low interest rate era, the former has recovered much faster from temporary difficulties and is now at a so-called five-year high.

It is true that there is one variable that would significantly increase the average annual return on shares of the Baltic countries when investing in certain companies. This is a dividend payment.

Looking at Nasdaq Baltic companies, the average annual dividend yield in the Baltics is 5-6 percent. Therefore, in certain cases, adding this return to the stock’s theoretical annual return can produce returns similar to those of the S&P 500.

Why, in aggregate terms, are certain stock markets more dynamic and more successful in recovering from crises?

First, the stock market of the Baltic countries basically consists of energy, banking, infrastructure, trade companies, that is, solid companies operating in traditional sectors. It has almost no fintech companies, pharmaceutical companies, e-commerce companies, which in recent years have invested in innovative products and services that create significant added value for business. In short, there are no domestic companies of this type, such as Apple, Google, Microsoft, etc., in the capital market of the Baltic countries.

Second, the vast majority of companies operating in the stock and bond markets are focused on the local market. Or at least they focus on the Baltic market as a place where they could develop their business.

In my opinion, business development takes place precisely in the international arena, where you are not dependent on one or two markets, the coincidence of their economic circumstances or changes in demand at certain moments. The more global the company’s ambitions, the wider the geographical ambition, the more diversified the risk and the greater the growth potential. Investors are looking for such companies. Perhaps that is why the gap between the Baltic index and the S&P 500 index is 30 percent. and perhaps that is why we do not yet see a definite upturn in the investment climate.

The capital market of the Baltic countries would benefit from more ambitious companies from global industries, whose business development possibilities are limited only by their own imagination. It would only be beneficial if one or two technology companies appeared on the market already this year, or at least companies looking beyond the Baltic countries. In this way, more sectors of the economy would be represented, investors would have more choice, and we could get a higher liquidity indicator, which is an important component of stock markets.