The no-confidence vote in Parliament has passed, according to reports on the initial vote count from Romania. We reiterate our view that the incumbent government was market-unfriendly (ad hoc regulation, fiscal populism) and any step towards forming a more market-friendly government should be welcomed by investors.
However, the path to forming a more market-friendly government (willing to rein in the fiscal deficit from c4% of GDP and re-energise structural reform) is not straightforward (an early Parliamentary election, winning over an electorate used to the populist measures of recent years, cooperation between unnatural political partners).
The valuation of Romanian equities, measured by the local BET index, has re-rated year to date after some of the draconian tax and regulatory measures proposed in December 2018 on the banks, oil companies and pension funds were diluted. After a 32% rally ytd in US$ total return terms, the trailing price/book is 1.1x (with trailing ROE of 14%), which is a 19% premium to the 5-year median. However, trailing dividend yield is a very attractive 8.5%.
Please see our recent report: Romania: Market-unfriendly government under pressure; potential positive for investors, 2 October 2019