Foreword

Romania’s EU accession: buy the rumour, sell the fact

By Vivid writer: Andrew Begg

A look at the current appetite of investors for everything Romanian

Posted: 25/05/2006

News that Romania will have to wait at least until October for a possible invitation to join the EU next year matters little in our opinion. Not only that, it matters little if, come October, it transpires that Romania doesn’t accede to the EU in 2007 at all, and has to wait another year. Romania is enjoying an unprecedented flush of prosperity and the pace of change that is occurring is the kind that Romanians could never have believed possible in their wildest dreams.

There is huge interest in Romania. It isn’t uncommon to drive in a particular area of Bucharest and almost lose one’s bearings, so completely has it changed since the last time you drove there. A lawyer friend speaking at a conference in London recently said that he was inundated with phone calls, to the extent that he was completely taken up with meeting potential clients wanting to do business here. Another friend said that if you can’t make money in Romania now, you can’t make money anywhere.

The current hysteria surrounding Romania reminds me of a stockbroker scenario in a bull market. A broker gets a call on his phone from a regular client:

“Buy!” the client shouts down the phone.

“Buy what?” responds the stockbroker.

“Buy anything!” comes the frantic voice of the client.

“At what price?” asks the stockbroker.

“At any price,” says the client. “Just get in.”

Romania's PM Calin Popescu Tariceanu, whom President Basescu has said might lose his job once Romania's EU membership is assured.
Picture: Amarjit Sidhu

Far be it from Vivid to put a dampener on things, but it is reasonable to question what form the pace of change will take in the future. Will it continue, with people just wanting to get in at any price, or will the market begin to show signs of topping out? Any analyst worth his chips will exercise caution when literally everyone, including mums, dads and taxi drivers are piling into the market, which is the case now, when the market shows no sign of slowing. Someone should remind them that for every buyer there has to be a seller. And if there are so many buyers, the sellers must be laughing all the way to the bank. Might it be just a matter of time until they take their profits and clear out, and go looking for somewhere else that is undervalued and cheap?

One of the problems of market analysis is that one can never be really sure where a market is in terms of a growth cycle. One of the most popular market theories is the Elliott Wave theory, which shows a bull market trending higher with three upward movements and two downward pullbacks, before a bear market sets in. The first move in a bull market is one major move upwards, then a pullback follows, then another, smaller move upwards, then another profit taking pullback and then a final spurt, in which everyone, including the mums and dads and taxi drivers all pile in, typically at the top of the market. The problem lies in identifying where we are in the five wave sequence – is this the first major move upwards, the third or the fifth? Everyone is piling in: just ask the next taxi driver you get a lift with, he’ll tell you.

You might argue that there has never been growth like this, but someone else could argue that the first move upwards began immediately after the Revolution, the next was the Constantinescu years between 1996 and 2000, and the Basescu years we are experiencing now, with the promise of EU membership dangling like an ever-present carrot that is just out of arms length, is responsible for the final move upwards. And as soon as EU accession is announced major sellers would move in.

But is there reason to be cautious? Let’s look at the fundamentals a bit closer. Vivid writer Florin Citu says that interest rates are probably too low to expect inflation to remain at a manageable level, and to guard against an inflationary spiral suggests that some kind of brake needs to be put on the economy. As the best form of batting down an overheating economy is to move interest rates higher, he suggests this is what the central bank should do, and sooner rather than later. Borrowing rates then become more expensive and you can guess the rest.

Politically speaking, there is reason to be cautious as well. Mark Percival’s May Vivid article indicates that despite the veneer of stability the political environment is far from that, with President Basescu suggesting that he will look for another prime minister as soon as Romania gets over the EU line. Possibly more telling is the lack of ideology in Romanian politics, which remains personality driven to an absurd extent. Romanian politics has been this way for far too long; Mark Percival is not the first Vivid writer to point this out and he surely will not be the last.

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