The Macedonian Stock Exchange - December 2007

The Macedonian Stock Exchange, as measured by its MBI-10 index, rose to a record high of close to 10,500 in mid-2007. It has since shed 40% of its gains. This correction, or, rather, rout has its roots is a series of converging factors.

The multiple failure of the financial system in the United States, brought on by the subprime mortgage crisis and its contagion, resulted in a dollar plunge and the ascendance of the euro. Investors fled the ailing American scene in search of higher and safer returns in the markets of emerging economies of commodities and oil producing countries.

This stampede coalesced with other trends to create a bubble of hyperliquidity. Financial technology made money transfers almost instantaneous, thus reducing the need for a non-productive and illiquid float. International trade expanded at a breakneck pace, shifting unprecedented amounts of wealth from consumers to producers and manufacturers. GDP growth throughout the world outstripped inflation, generating sizable surpluses. The global monetary environment swung from inflation to deflation leading to a precipitous decline in interest rates.

Inevitably, investors migrated from cash and bonds to assets such as real-estate and stocks, fostering in the process a series of bubbles, booms, and busts as volatile "hot money" pursued returns everywhere.

Moreover: in contradistinction to the recent past, diversification offered no refuge as financial markets merged and integrated with global, around the clock networks. To their dismay, investors found that, paradoxically, as markets became more efficient, they also become more correlated. This convergence was further enhanced by geopolitical and geo-economic processes, such as the enlargement of the European Union.

Macedonia could not remain aloof. As its informal economy emerged from the shadows, capital controls were lifted, capital mobility increased, and foreign firms and investors entered the scene. The more the business climate improved, the better Macedonia's prospects appeared, the higher Macedonian stocks were valued by an euphoric public. Macedonia's professionals did nothing to restrain the hysteria or to ameliorate the casino mentality that pervaded the entire system. They benefited personally from the bubble.

The newfound optimism of Macedonia led to a repricing of risk and to heightened expectations of corporate profits, boosted by a more lenient tax regime and by decreasing interest rates. Equity risk premium plummeted until it vanished altogether and even became negative. The P/E multiple reached a stratospheric 50 before the recent correction. It is still pegged at an unsustainable 37.

Throughout this Bacchanalia, foreigners flocked into the Macedonian Stock Exchange, constituting 30-40% of the buy side. But they have begun to withdraw owing to big privatizations back home, troubles in their domestic financial systems, a more restrictive monetary policy in some countries, and the changing fortunes of the Macedonian marketplace.

The down trend in the Macedonian Stock Exchange is not a mere correction. It is a repricing of assets. It still has a long way to go. Even at 4300 - the next massive technical support - Macedonian shares are inanely overvalued.