The Ukrainian stock market is behaving illogically and even paradoxically. A record increase in the value of securities is occurring in parallel with a cooling of the domestic economy. This year, the PFTS index has grown by 10%, and as of February 14 stood at 388 points. It is difficult to find any other explanation for this surge on the stock market besides the speculative expectations of buyers.

Accelerated growth against the backdrop of general stagnation

In countries with market economies, the stock market is customarily considered the main indicator of a country's economic condition. However, events on the domestic securities market indicate that there is practically no connection between it and economic development. The domestic economy continues to stagnate. According to January results, the decline in industrial production was 2.9%, something that had not been observed for five years. Certainty regarding future gas prices for industrial consumers appeared only in the first ten days of February. And this can hardly be called a positive signal for the market — an increase in energy prices is inevitable. Inflation in January was recorded at 1.3%... In a word, economic reasons for the growth of the PFTS index are not yet visible. Nevertheless, securities quotations have been rising for the second month already. Of course, one can traditionally explain this trend by the undervaluation of Ukrainian enterprises' assets compared with analogous Russian or European ones. However, today such arguments no longer sound very convincing. For example, the ratio of capitalization to profit among domestic metallurgists and energy companies is sometimes higher than that of their colleagues from Russia, and sometimes even from Eastern European countries.

In reality, the current market growth is purely psychological and was provoked by certain statements from officials and company managers. For example, high-ranking officials announced plans to privatize "Luhanskteplovoz" and "Ukrtelecom" in 2006, while "ISD" and "AvtoKrAZ" announced plans to conduct IPOs on foreign platforms. Naturally, market participants immediately understood that shares of these enterprises bought now could soon be profitably resold to Western investors.

Shift of profitability to the second and third tiers

2005 turned out to be successful for the stock market. Over the past year, the capitalization of securities on the PFTS doubled — to UAH 147.3 billion. Trading volumes also more than doubled (to UAH 14.5 billion). Significant changes occurred in the structure of trading. The hegemony of the market for corporate and municipal securities was replaced by the government securities market. Toward the end of the year, a worthy competitor appeared in this segment — the stock market. In 2005, this was facilitated by foreign portfolio investors' interest in Ukrainian assets. The successful IPOs of three Ukrainian companies on the London Stock Exchange also played a role. At the end of the year, the company "Retail Group," which manages the "Velyka Kyshenia" supermarket chain, was able to conduct a domestic IPO.

The PFTS index grew by 35.7% over 2005 — to 352.97 points. This is less than in 2004 — then in December it sharply increased on a wave of enthusiasm during the Orange Revolution and allowed investors to earn quite well. However, if one takes into account the slowdown in GDP growth and industrial production last year, the growth in quotations of the latter should be counted among the market's successes. As experts predicted, in 2005 investors' attention and maximum profitability shifted to the second and third tiers of securities quoted on the PFTS (mainly these are enterprises in the coke-chemical industry, the mining and metallurgical complex, and oil refining). In particular, quotations of shares of coke-chemical industry enterprises increased several times over. The leaders in the dynamics of bid quotation growth in 2005 were shares of the Nizhnodniprovsky Pipe Rolling Plant, Northern Mining and Processing Plant, and "Kryvorizhstal." The record holders in bid quotation were "Kryvorizhstal," "Donbasenergo," "Zakhidenergo," Northern Mining and Processing Plant, and Ukrsotsbank.

Immodest forecasts

In the long term, the Ukrainian stock market is doomed to growth — at least given its underdevelopment. The ratio of the capitalization of the Ukrainian stock market to the country's GDP does not even reach 10%, whereas even for Russia and Poland this figure exceeds 35–40%. According to experts' estimates, the current year could well become a turning point in this matter. Slowly but surely, Ukraine is still moving toward the world market. The expected accession to the WTO, the reorientation of commodity flows to the West, and closer cooperation with the European Union — all of this will affect the stock market. The gradual increase in the civility of our companies and their desire to meet international standards forces owners to increase capitalization, "expose" net profit, and enter the organized market.

Our officials have also turned to face the market. Viktor Yushchenko, for example, issued a number of orders at the end of last year on the topic of stock market development.

Analysts estimate the possibility of stock market growth in 2006 at up to 60%. If the political situation is stable, some enterprises may increase in value even more. At the same time, the organized stock market will remain narrow, since traders work with securities that remained on it after privatization, rather than with those issued for the purpose of raising capital. This year, a certain redistribution of investors' interest is expected from shares of system-forming industries (chemistry, metallurgy, machine building) to newcomers to the stock market (food industry, retail trade, real estate, the banking sector, and mutual investment funds). There will be significant demand for the assets of companies specializing in servicing individuals. These are banks and large retail chains.

Permanent systemic problems

And yet the problems of the stock market must be solved, and systematically at that. Our market, in ten years of its existence, has never become a full-fledged instrument of the domestic financial system. In countries that aspire to a market path of development, the stock market is primarily a mechanism for companies to raise the necessary borrowed funds and a system of competitive regulation of the economy, and only then a place for speculation. The Ukrainian market is obviously speculative. The narrow circle of players on the market is also a problem. The share of ordinary citizens' funds on the Ukrainian stock market is less than 1%.

For most Ukrainians, the stock market still remains some kind of foreign trick imported into Ukraine on a wave of endless market reforms. Meanwhile, for the whole world, buying securities is as familiar an element of people's daily lives as paying utility bills or buying household goods. From childhood they know well that the best way to preserve and accumulate money for major purchases, education, and a secure old age is to invest it in securities. Shares in a stable economic environment yield a profit on average five to six times greater than bank deposits. Only when we too arrive at such a ratio will it be possible to speak seriously about the level of market orientation of our economy.

Artem SVYATNENKO

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