October on the global stock markets looked like a month when the banking system might collapse. The volatility on the market was unusually high. I have had 15 years of experience with the market (most of that time as an active investor) but I have never seen anything like it. What’s more, analysts and investors interviewed on foreign television channels said the same based on even more experience (25 – 30 years). It seems fair to say that none of the living analysts have seen anything similar before. Fortunately, politicians did the right things: the US Congress first (and not without resistance) adopted a plan to buy “toxic assets” from banks, followed by European efforts to help local banks (in a more reasonable way).

 

All of this has started to help the markets. LIBOR rates on the inter-bank market fell, indicating a recovery of confidence among financial institutions. In addition, central banks world-wide sharply reduced interest rates and the IMF helped States in trouble (like Ukraine or Hungary). This created a critical mass which triggered euphoria on the global markets in the last week of October. It was enough to slow down the forced sale of assets (funds didn’t want to sell buy they had to) and losses were significantly reduced. But not all market participants benefited.

 

In October, few if any transborder stocks avoided huge losses. Looking at the charts, they only differ by the scale of loss (a 30 – 50 percent fall was typical). The stocks of the segment did not really benefit from the relatively strong correction which boosted indices on the global markets. The reason was quite simple: at a time of correction, demand (especially on the part of pension funds which were out buying) tends to focus on most liquid large caps. As a result, the Czech corporation CEZ rose relatively fast.

 

On the other hand, there were many poor performers. Astarta (down 50 percent) and Kernel were hit very badly. Falling commodity prices precipitated a fall of agricultural product prices; this was aggravated by huge problems in Ukraine. A weak position of Ukrainian banks combined with a tricky political situation had to trigger falls of Ukrainian stocks. The falls of commodity companies (New World Resources or MOL) came as no surprise as commodity prices kept falling until the last week of October. Likewise, falls of property developers (Immoest, Orco, Atlas) could be expected: the credit crunch and falling prices of residential property must cost them a lot, and some of them may even go bankrupt.

 

However, a sharp fall of the recent top performer CEDC could not be rationally explained: after all, a spirits distributor can only benefit from falling commodity prices. Another leading performer, CEZ, also fell although demand for electricity will not be wiped away even if the economy slows down. Asseco Slovakia was not helped by a report on the planned buy-back of shares. What the falls of these three stocks had in common was an irrational sell-off verging on panic. The trend affected the entire segment. No wonder: since investors were selling all assets, these relatively illiquid stocks also had to suffer.

 

According to many analysts, this is only a short-term correction. But knowing the optimism of US investors (a lot depends on them now) and asset managers’ drive towards annual (or at least quarterly) bonuses, I think that the last months of the year will be the time of the bulls. If this happens, transborder stock will also rise, especially the recent best performers following their strong falls.