Sovereign bonds protected the non-bank financial market from risks caused by pandemics, and the aversion to risk of investors has come out during the crisis caused by COVID through their migration from stock markets to government securities. All these three financial non-banking sectors - capital market, private pensions market and insurance market - protected themselves against the financial risks caused by COVID-19 pandemics by portfolio-owned sovereign bonds. Private pension funds have an exposure of 67% on government bonds insurance companies invested 42% of their assets also in government bonds, and the investment portfolio of collective investment undertakings have about 62% sovereign bonds.
It is important to analyse the degree of interconnectedness at local level of non-banking financial markets, as well as the manner in which this may encourage the spillover of economic tensions generated by the medical crisis in the context of the severe impact of the COVID-19 pandemic on global economy and of effects created by the phenomenon of economic contagion. The specifics of insurers, investment funds and pensions funds activity makes the financial assets to held an extremely important role for their capacity to comply with the obligations assumed toward policyholders / investors / participants. At the same time, a shock felt by one of the issuers of such instruments or one of the markets on which trades them, holding a significant weight in aggregate assets at the level of one of the financial sectors might have an implicitly effect on the respective sector s performance or stability. From the perspective of ensuring financial stability, monitoring the interconnectedness of non-bank financial markets, from the perspective of balance sheet items, it is all the more important that it can contribute to the identification of risks migration between the three markets. Moreover, the report on the stability of non-banking financial markets, drafted by the Financial Supervisory Authority (ASF) approaches the analyse of balance sheet exposures between sectors or between individuals entities as a method used to monitor the level of interconnection between markets. For entities active in non-bank financial markets, most of them being institutional investors, exposure to a few main classes of actives and the markets on which they are traded -government bonds, bank deposit or shares - are relevant.
Milestones on Capital Market
Market capitalization on the regulated market reached at the end of March 2021 the level of 179.49 billion RON, increasing by approx. 16% compared to March 31st 2020. Thus the first quarter of 2021 marks the entry on an upward trend of capitalization, The Bucharest stock Exchange (BVB) showed a positive evolution in spite of COVID-19 pandemics. BET-index reflects the price evolution of 25 most liquid companies listed on BVB regulated market, and had experienced a rise of more than 46% on 31st of March 2021 compared to March 2020. Total value of transactions on the BVB regulated market and the Multilateral Trading System (SMT) increased by 35% in the first quarter compared to the same period of 2020, reaching the level of 4.98 billion lei. Around 94% of the total value of transactions took place of the regulated market of BVB the rest being carried out on SMT. The total number of transactions carried out at BVB rose by 37% in the first three months compared to Q1 2020. The shares remain the dominant class of financial assets with a 67% share of the total value of transactions on BVB by 31 March 2021. In the first quarter of 2021, the value of transactions in government securities recorded an ascendant evolution compared to the same period in 2020, having a level of approximately 852 million lei.
The total value of the assets of collective investment undertakings (OPC) in Romania reached 44.36 billion lei at the end of the first quarter in 2021, up by around 7% compared to 2020. An analysis by category of collective investment undertakings shows that at the end of March 2021, the total assets of the open-end investment funds (FDI) increased by 7.5% compared to the end of December 2020. Alternative Funds of Investment have experienced the most significant increase in total assets compared to the end of 2020 that is 7.75%. At the end of March 2021 the net cumulative assets of the SIFs recorded an increase of around 8.2% compared to the similar period of 2020.
Overall market, the consolidated structure of investments from all collective investment undertakings indicating a preference for equity securities of a total value of 21, 46 billion lei, accounts for about 48% of the total assets of the OPC. Investments in fixed income financial instruments on the whole market, were worth 20.97 billion lei representing around 47% of the total assets of the OPC: At 31 March 2021 compared to December 2020 an increase of investments carried out in OPVC/AOPC securities (16%), shares (9%), government securities (7%) and deposit liabilities and holdings (4%) was recorded at the same time with a decrease of 4% for bonds. In terms of the number of investors, this is much lower in the case of alternative financial funds compared to the number of investors in the open-end investment funds. Therefore, at the end of March 2021 the number of investors in alternative financial funds stood at 88,525. Of them, the largest by far (88.245 persons) are investor’s physical persons.
Concerning financial services, providers at 31 March 2021 on the regulated market of BVB 27 brokers were active, of which 16 financial investment services companies (SSIF), 4 local credit institutions and 7 entities authorised in another EU member states. Also at the end of March 2021 20 intermediaries were active in the SMT, of which 15 financial investment services companies (SSIF), 4 local credit institutions and one investment company authorised in another EU member state. Therefore, at the end of the first quarter of 2021 the most active brokers on BVB (regulated market and SMT) were the SSIFs, the value brokered by them is of about 5.71 billion lei Local brokers (SSIF and credit institutions) accounted for about 91% of the total value brokered. Of intermediaries authorized in other EU Member States that carried out transactions on the spot markets, the most active were the investment companies; these together have a market share of 5.86%. In the first quarter of 2021 in Romania 18 Investment management companies (IAS), 81 open investment funds (FDI), 26 alternative investment funds (FII), 5 financial investment firms (SIF), Proprietatea Fund and 4 depositories carried out their activity.
The two components of the capital market – Exchange and collective Investment undertakings (CIU) - face different sets of risks corresponding to specific operating conditions. Thus for the OPC market the most relevant are the investment risks, the credit risk and the liquidity risk. For the stock market, market risk and liquidity risk are relevant. Most recent report on the stability of non-bank financial markets, drafted by ASF, emphasizes that, in the light of the interlinkages between the financial markets, the transmission speed of potential internal or external shocks can be increased; there is the possibility of steep corrections whether factors are emerging and contradict optimistic expectations of economic recovery. For the collective investment undertakings market the most relevant are investment risks, credit risk and liquidity risk. These are managed generally in an adequate manner overall market-wide by diversifying and respecting investment policies assumed through fund prospectuses. The reduced complexity of the market makes it for now that these risks are not amplified, complex financial instruments (such as derivatives, structured finance instruments, bonds originated in securisation etc.) do not have a significant weight in total assets. On the local stock market, high volatility triggered by the COVID-19 pandemics started to diminish significantly going back to previous level before the pandemic started currently, the volatility of BVB indices remains weak and the regime is still medium to low. From the local stock market point of view on the whole, the most important risk is that of its maintenance at a reduced level of development (in terms of capitalization, liquidity, diversification of issuers and instruments etc.); this would have a negative impact on other components of the financial market (e.g. insurers, pension funds, collective investment undertakings) and on the economy as a whole (limited access to market financing as an alternative to bank funding).