Re-denomination to make stocks appear cheaper

Slashing four zeros from the local currency is likely to make the stock traded on the capital market appear cheaper. This psychological effect would lead to a slight appreciation of stock prices. Though brokers” opinions differ as to the effects of the re-denomination in terms of stock prices, none have so far predicted any negative effects, with the exception of those caused by possible errors at the moment trading orders are introduced.

Last week”s activity on the Bucharest Stock Exchange shows that some market players are trying to anticipate the positive effects of re-denomination, especially for stock worth less than 1,000 ROL (0.1 RON) where the psychological effect of re-denomination is likely to be stronger.

“I believe shares will grow a little, by between 2 and 4%, though I expect the effect to be more visible for cheaper stock quoted at below 1,000 ROL. It will take some time before we get used to the new prices, but I don”t believe there will be any negative consequences for the market,” says Rares Nilas, BT Securities manager.

Last week”s biggest gainers on the market were Sofert Bacau, which saw a 10% increase to 77 ROL/share (0.0077 RON/share), Carbid Fox Tarnaveni, which grew by almost 5% to 950 ROL/share (0.0950 RON/share), and Rolast Pitesti with growth of 3.2% to 950 ROL/share (0.0950 RON/share). However, other stocks quoted at below 1,000 ROL (0.1 RON), such as Rompetrol Rafinare, Astra refinery and Siretul Pascani, ended the week lower.

Experience from other countries that have also been through this type of process shows that the effects of re-denomination on stock prices were not strong enough to change the direction of the market. Most stocks on the Bucharest markets have been flat over recent months, meaning the effects could be more visible.

Turkey recently cut six zeros from its currency, the lira, at the start of January this year. During the first month of re-denomination (January), the official index of Istanbul”s Stock Exchange, the NATIONAL-100, grew by 9.4%, and then again in the second month by a further 3.9%, resulting in a 13.7% gain over the first two months, according to research by Intercapital Invest brokers. The influence of re-denomination on the market is hard to judge, however, as the market was going through a period of growth before the re-denomination took place.

“If there are any effects, I don”t think they will be very significant, nor will anyone be any richer after the change to the RON,” said Razvan Pasol, chairman of Intercapital Invest.

On the other hand, Bogdan Trandafir, an analyst with BCR Securities, believes “the re-denomination will have visible effects on the market, and a number of errors may occur, which could hurt the market.”