Investing in Estonias stock market
Estonia is really for us, a Scandinavian country that was held back by communism. There is no reason to doubt that Estonia will eventually be as wealthy, productive, and innovative as Sweden, Denmark, Finland, Norway or Iceland. Estonian is closely related to Finnish with a strong Germanic and Swedish influence, just the like the people and the country.
Estonia is exceptionally well-run, and really does not belong in the Frontier Markets’ arena, other than for its rather late independence, post-Soviet collapse and its still-developing capital markets.
The economy and country have been well managed as can be seen in Figure 1 below. Estonia suffered badly in the 2008 recession, when real GDP growth was -14%, but despite that, Estonia was one of the donor countries for Latvia’s bailout in December 2008. GDP growth in Figure 1 is contrasted with returns for the Tallinn Stock Exchange (TALSE).
Figure 1: TALSE annualized returns and Estonia’s GDP growth:
The TALSE has performed strongly over its history. It was founded in 1996, and since then, has returned an annualized 12.5%. Estonia joined the Euro in 2011, after fulfilling all the Maastricht criteria in 2010. This was really a return to normalcy for Estonia, as the currency was pegged originally to the Deutsche Mark. Given the size of the country (see Figure 2 below), it makes little sense for the country to deal with its own monetary policy.
Figure 2: Estonia Fact Box
The one glaring line item is the debt-to-GDP ratio. Estonia has been prudently managed for its history. The government did consider borrowing heavily in the midst of the GFC, but restrained itself. Since then, Estonia has emerged stronger than ever and holds more foreign reserves than debt. The country is in an enviable position fiscally, and well-positioned to continue its economic ascent.
Typically, a country with an HDI and literacy rate as high as Estonia’s would not be on our radar. However, we feel that Estonia is very much a Frontier Market because of its small equity market and its vast potential.
The Laws
The Estonian legal system is firmly entrenched in European law, and given its membership in the EU, the norms in the Eurozone apply here. There should really be no concerns here, but if you are interested, a great overview by NYU is available here.
The Tallinn Stock Exchange is operated by NASDAQ OMX. Investor safeguards are what you would expect in any developed market. Here is the link for all the rules and regulations of the exchange. The government does not screen foreign investments or set any limitations on foreign ownership. There are restrictions on private equity however, specifically relating to sensitive sectors such as mining and energy.
The Estonia Stock Market
TALSE launched an alternative market, First North, for those listings that do not meet the criteria of TALSE for listing; specifically having a market cap that is less than 4mm EUR, and a free float of at least 25% or worth more than 10mm EUR.
Some basic facts on the market are provided in Figure 3 below.
Figure 3 – TALSE Factbox
There is not much to get you excited, if you’re an institutional investor. Small population, total market capitalization of a small cap name, only 13 members and very limited turnover. For institutional investors, there are four investable companies in Estonia. For individual investors, the country is a little more interesting.
There are 8 companies with a market cap above $50mm. The market overall, has a trailing P/E of 19, but that is driven disproportionately by an expensive Food Products company, Baltika AS. Looking at only the 8 companies with a market cap above $50mm, the market has a trailing P/E of 15.8, which is reasonable. Figure 4 below, provides an overview of those 8 companies.
Figure 4: List of companies in Estonia with a market cap greater than $50mm
The largest two companies in Estonia are focused primarily on tourism. Tallink, the largest company in Estonia operated a number of divisions but gets most of its revenue from its hotel and cruise operations. Estonia is a shopping destination for Finns and Swedes escaping the prices in their respective countries. PPP per capita in Estonia is only $27,500 compared to $46,400 in Sweden and $40,485 in Finland. Olympia Entertainment operates casinos and hotels in Estonia, Latvia, Lithuania, Poland, Slovakia, Belarus, and Italy. As can be gleaned from the list of companies on the stock exchange, Estonia is first and foremost a service-led economy. It has a couple of companies with strong regional brands, but lacks a company that would be considered a global heavyweight. Estonia certainly has the potential to develop and curate such a company, and that is what makes us interested in the market. It is noteworthy that Skype was developed by Estonians in Estonia.
Can Foreigners Invest?
Absolutely. It is very easy to invest in Estonia, as either an institutional or retail investor.
- Open an account with a broker registered on TALSE. It is extremely easy. You can sign up online and then e-mail the broker copies of your passport and identification; all standard items. Most websites in Estonia are available in English, so language is less of an issue than in many other markets. A broker we would highlight is LHV. Please also note that the vast majority of European banks allow you to trade Estonian stocks online with ordinary trading accounts.
- Fund the account. You can wire money from your foreign account and you do not require a local bank account. TALSE has fully automated online trading.
It really is that simple.
Caveats
We are highlighting the investment case for Estonia, but there are of course numerous issues with Estonia, as there are with any other market. Estonia does not have any growth coming from population, and is in fact facing a population decline. There has been a resistance towards immigration, and that has led to difficulties for corporates to find appropriately qualified people. This issue is a disincentive to locating in Estonia and is one of the major headwinds for the country.
