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Vilnius is the geographical centre of Europe, even if some in Paris may disagree. The problem for companies in the Baltics — the “New Near Abroad” — is that people in London have different perceptions, and this gets more acute as you move across the Atlantic to that great “Europe over there”, as Sir Harold MacMillan used to call it. To raise finance from Western sources means that you have to understand Westerners, and you cannot expect to separate rich men from their cash without first making them feel good about you, and about themselves. As Robert Burns said about watching a louse on a lady’s bonnet in Church:

“Oh would some Power give us the gift, To see ourselves as others see us! It would from many a blunder free us, And foolish notion.”

London, the City and its foibles

But before you make them feel good about you, you have to first understand them. And, a lot about the financial markets psyche of London today is based on what happened in the 1990s.

During the 1990s, the Financial Times share index went up three times. The effect was compounded by annual growth of 11-12%. Most insurance companies, however, paid out just a few percent to policyholders having ‘with profits’ policies. Happy days for the bosses with their Ј1 million plus annual salaries, unhappy days for pensioners and those who had relied on such policies to pay their mortgage debts at maturity. Even before the bear market started in the new millennium, the insurance companies were complaining that they wouldn’t be able to cover their promises.

Then the market fell…and so far no journalist seems to have had possession of the pocket calculator required to figure out what really happened in the 1990s. Insurance companies, and other forms of saving suitable for ‘widows & orphans’ were in the past able to balance bonds with shares. Bonds are a promise to pay back principal, but their interest and coupons are only as good as the company or government backing them. The majority of professional investors during the 1990s bull market  simply forgot that they were looking after other people’s money. They saw the challenge as getting bigger deposits and making money out of other people. As a result, size, not quality and reliability of investment returns, came to dominate. Had insurance companies had a prudent balance of stocks and bonds, they would not be in the mess they are in today. Investment ‘experts’ actually began to follow the percentage of shares required by an index, so that everyone became like everybody else. Indexed funds are guaranteed underperformance: they sell too soon and buy too late. What does this mean for our friends in the New Near Abroad? Simply that it is very difficult now to find in London serious buyers of new share issues in small companies. Honest, bread and butter stockbroking, supported by independent investment research, has all but dried up.

Initial Public Offerings

Because so many UK and European fund managers are closet indexers, and because they are so afraid of the regulatory regime and of legal threats for spending money for services that are not absolutely necessary to keep up their “deposits”, there has been a catastrophic fall in commission

rates on ordinary share dealing. You cannot support independent investment research for 0.2%, let alone expect any research when new money is put into what are essentially indexed funds through Program Trading for 0.01%. IPOs are therefore hundreds of times more attractive for the investment banks than bread and butter stockbroking / research.

There are noble exceptions. A very few large portfolio managers actually pay for research as well as maintaining a large staff of real analysts. They visit companies. They take note of outside research. However, for our Baltic readers, there are unfortunately only a few big investment houses with the specialist skills required to find your company shares attractive. Thankfully, there are a number of small specialty firms, which live entirely by doing what fund managers should do — trying to make money FOR their clients by picking good, undervalued shares and selling bad, overvalued ones.

EU Membership makes you bureaucratically acceptable

EU membership does bring a Good Housekeeping Seal of Approval to your company and your shares, and makes them far more acceptable to those wishing to put them into their Stock Market Indices.

To look further on the bright side…if, as I think, hard times are coming in the world, then companies in the New Near Abroad will become much more important as investment targets. Smaller Baltics companies offer ways to do things more cheaply than can be done in the overblown rest of Europe. Big companies in England or in Germany can get into big trouble, and need smaller companies in smaller, more flexible countries, to help them get out of it. The old Hansa is mini-globalization working for you.

Economics and the Share Market — does it matter at all?

Over the past ten years, the Estonian economy has grown 5.6 times. The Lithuanian economy is now the fastest growing in the whole EU. Latvia has the great city of Riga, and holds the traditional gateway to the West for Russian business. If we roll in Kaliningrad as a potential Hong Kong of the Baltic, you have 8m people in the New Near Abroad. I suspect that Sweden, with the same population, will continue to export capital to the Baltics as the prospects there are much better. But what role has the Stock Market played in these countries? Basically, the national markets have been a place where outsiders could, painfully slowly, buy shares in the hope of selling them later as a block to a foreign corporation once it finally wakes up to the need to be in your country. Big companies, it seems, like to buy overpriced shares…and serious fund managers should oblige them by selling.

Now that the Swedish-Finnish exchange has absorbed the national exchanges in the Baltic countries, everything is rolled together. Eventually, all the electronics, all the pharmaceuticals, will be rolled together in one list. Only the top tier will interest the ‘closet indexers’ noted above. Shares that should be big and liquid, such as utilities, are either foreign controlled already or have a tiny free float. Even though turnover off market, especially in Riga, is far bigger than official trading, the daily turnover on Helsinki or Stockholm is hundreds of times greater. Sadly, it is no longer so easy to find these comparative statistics as it was in the days of local exchange websites.

But a successful IPO (good product, good numbers, good management), especially in Riga, will without doubt attract attention.

JEFF ROBERTS, Impivaara Securities

Impivaara Securities is a research company focussing on the Russian, Baltics and Finnish markets, providing research, analysis and results for corporate clients.