Prague Stock Exchange continues to see record trading

Investors' pockets have grown a little fatter in the past 12 months, as the Prague Stock Exchange had a second year of unparalleled growth in 2005, even reaching the one trillion crown mark for the first time. Analysts are predicting more of the same in the coming year. And it seems that with more individual investors returning to the market, the bourse may have finally shed its shaky past.

For the second year running, the value of trades on the exchange doubled, reaching an all-time high of 1.04 trillion crowns. Mirroring that increase, oil and chemical group Unipetrol and power provider CEZ were the biggest winners on the market, with their share prices growing 137 percent and 113 percent, respectively. Most companies had good years, as well, including newcomers Ocro Property Group, a developer, and media group CME, owner of Nova Television, both adding 60% to their initial price.

Tomas Gatek, head of equity research at trader Patria Finance, explains what was behind the strong showing of the bourse:

"In 2005 we had maybe two main reasons for the growth. One is the growth of the earnings and the performances of the companies themselves. And the second is the massive inflow of investment from abroad, and pick up in the investment from local retail clients, as well."

While foreign institutional investors still claim the lion's share of trades on the PSE, an increasing interest from smaller Czech investors is welcome news for many. Petr Koblic, the chief executive of the Prague Stock Exchange, says these types of investors now account for 10% of traders, a number that is still far lower than other regional markets, for example in Poland, where it is around 35%. Still it's much better than even a few years ago, when that number was almost zero.

"We very much like to see much more domestic both retail and institutional but mainly retail investors who are returning to the market after some bad experiences from the end of the 90s."

Koblic says the exchange's past negative image wasn't entirely its own, but shared by the entire capital market. Now, however, the Securities and Exchange Commission, or SEC, helps regulate the bourse, avoiding past problems.

"There was a bunch of privatisation in 1993 and in 1995, and there were about two-and-a-half thousand companies basically listed on the market and probably 2,300 of them should have never hit the market. They were too small and too weak against takeovers, so takeovers started immediately on day one, and the SEC was not in place. So there was basically no protection for the minority shareholders at all. Since 1998, when the SEC was created, the situation has started to improve slowly—there was some improvement in the law. And I would say we don't have a big negative issue in the last year about any stock or an issue about any fund, which is very good."

2006 should be another good year for the market, although analysts don't expect to match the record pace of 2005. Patria's Tomas Gatek foresees growth between 10 to 15 percent, helped by the fact that lower valuations of companies on the Czech bourse are still seen as a bargain for western investors. Although that will not last forever:

"Already we've seen two or three years of strong growth so the valuations are getting tight and they are getting close to western peers. Therefore we could see a slowdown on this ground but also perhaps the earnings growth of the companies could slow down and the positive news we have so far could be priced in the market already."

However, new listings and trading products could counter slower growth. Koblic says brokers have five to ten new issues in the pipeline and he would be happy to see three or four of them materialize this year. He, too, is confident in the next trading year, saying a growing Czech economy also means a growing capital market. Still, appropriately, he declined to offer listeners any stock tips.