The free float rates of the main companies at the Bucharest Stock Exchange (BVB) are shrinking because not only the pension funds, but also the ETF issuers are buying on other bases than fundamentals, which makes the market prone to high volatility, according to a column published by Radu Crăciun, vice president of the Association of Independent Administrators, published by Ziarul Financiar. 

“The real free float of listed companies has been in continuous decline as a consequence of the "buy and hold" investment strategy (...) As the demand for ETFs increases, issuers of new ETFs are forced to "cover" them by buying new and new shares to replicate the BET (which the ETF mirrors). But these investments are on "automatic pilot". They do not take into account the fact that some shares may be overvalued and others undervalued," wrote Radu Crăciun. 

Thus, the change in market dynamics could amplify the volatility of indices, meanwhile creating the premises for the formation of a bubble, explains Craciun. 

The risk profile of the local stock exchange increases significantly, Crăciun warned.

Increasing the risk profile is an important topic in a context in which legislative initiatives inappropriately suggest that the risk of investing in stocks is decreasing, allowing allocations of up to 100% in stocks, unlike the US, whose stock market has an infinitely greater depth. 

The main blue chips index at Bucharest Exchange, BET, surged by over 80% y/y and by 38% since the beginning of the year only.

The Bucharest Stock Exchange started the July 7 session at a new historical high, but the enthusiasm quickly faded: investors switched to profit-taking, the BET index closed down 1%, and Hidroelectrica, the most valuable company on the market, lost almost 4%. The correction came after a strong start to July, in which the main stock exchange index rose almost every day, and several major issuers reached historical highs.

iulian@romania-insider.com

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