New Equity Indices for Czechoslovakia
Bryan Taylor, Chief Economist, Global Financial Data
One of the countries whose equity history has not been explored in detail is Austria. Austria is one of the few countries for which we have over 200 years of data for stocks, bonds and bills. The only countries with longer histories are the United Kingdom, France, and the United States.
The Vienna Stock Exchange has been in operation for over 250 years. Austria’s public debt began trading in Vienna in 1763, in Amsterdam in the 1780s and London in 1795. Shares of the Austrian National Bank began trading in Vienna in 1817. Austrian railroads and banks traded on exchanges in Austria and Germany during the 1830s and by the 1870s, hundreds of shares traded in both Germany and Austria.
Before 1914, stocks from all areas of the Austro-Hungarian Empire traded in Vienna, but after World War I, the Austro-Hungarian Empire was broken up, and the regional exchanges in Prague and Budapest became the primary national exchanges for Czechoslovakia and Hungary. In 1948, the stock exchanges in Prague and Budapest were closed when the government nationalized all the major industries. Only in the 1990s did these two exchanges reopen.
In 1913, Austria-Hungary represented about 3% of global market capitalization, but today, Austria represents only 0.10% of S&P’s Global Market Index of 50 countries and only 0.13% if you include Hungary and the Czech Republic. In 1913, the Austria-Hungarian Empire was one of the great powers of Europe, along with England, France, Germany and Russia. Vienna was a cultural center where Sigmund Freud, Guztav Klimt, Arnold Schoenberg and others contributed to the nation’s culture.
The Austro-Hungarian Empire
Before World War I, the Austro-Hungarian Empire was one of the largest economies in Europe. The Empire included all of Austria, Hungary, the Czech Republic, Slovakia, Slovenia, Croatia and Bosnia & Herzegovina as well as parts of Poland, Ukraine, Romania, Serbia, Montenegro and Italy. It should be remembered that Austria stopped the Muslim invasion of Europe at the gates of Austria in 1529 and again in 1683.
The Duchy of Bohemia was recognized as an Imperial State of the Holy Roman Empire in 1002, became a kingdom in 1198 and was integrated into the Habsburg Monarchy in the 1500s. Austria suffered defeat during the Napoleonic Wars and the Holy Roman Empire came to an end in 1806. The Congress of Vienna in 1815 established Austria, which included Bohemia and Moravia, as one of the four European powers along with England, France and Russia. However, the empire was multi-ethnic and the different nationalities within the Austro-Hungarian Empire strived for independence.
Archduke Franz Ferdinand was assassinated in Sarajevo in 1914 which led to the onset of World War I. After Austria’s defeat in World War I, the Austro-Hungarian empire was broken up under the Treaty of Saint Germain in 1919. This led to the creation of several new countries, Austria, Hungary, and Czechoslovakia, and the remaining parts of the Empire were allocated to Yugoslavia, Poland, Ukraine, Romania, Serbia and Italy according to their linguistic and cultural heritage. Czechoslovakia was the only country of the Austro-Hungarian Empire that remained democratic between World War I and World War II. Nazi Germany took control over the Czech lands after the Munich Agreement of 1938. Czechoslovakia was freed from Nazi rule in 1945, and after a coup d’etat in 1948, Czechoslovakia became a communist country in the Eastern Bloc. The Velvet Revolution ended Communist rule in November 1989 and on January 1, 1993, Czechoslovakia dissolved into the Czech Republic and Slovakia.
Austria and Czech Government Debt
The Vienna Stock Exchange was established in 1771 as a place where Austrian public debt could trade. Austrian debt was also issued in Amsterdam, Vienna, London and other cities in Europe during the 1800s. Austria suffered inflation during the 1790s reducing the value of its banknotes to 15% of their face value. Austrian banknotes were devalued by 80%. The Austrian National Bank was created in 1816 and in 1817 the bank began issuing currency. Austria suffered through revolution in 1848 and 1849, suspended payments on its debt in 1849, suffered militarily during the Prussian-Austrian conflict of 1850 and the Crimean War of 1853 to 1856. Austria suffered defeat in the Austria-Prussian War in 1866, faced rebellion from Hungary in 1867 and suffered a “Boersenkrach” stock market crash in 1873.
Austria-Hungary was defeated in World War I and its debt was reallocated among the surviving countries with Czechoslovakia taking about 40% of Austria’s debt. Czechoslovakia suspended payment on its foreign debt during World War II, but began servicing its debt after the war was over. The yield on Austrian bonds between 1788 and 2022 is illustrated in Figure 2.
Figure 2. Yields on Austrian Government Bonds from 1788 to 2021
Figure 3 illustrates the yield on Czech Bonds between 1922 and 1972. Czech bonds were in default during World War II. After the war, Czechoslovakia began paying interest on its bonds again, but after the Communist coup d’etat in 1948, Czechoslovakia went back into default and remained in default.
Figure 3. Czechoslovakia External Bond Yields, 1922 to 1972
Both the Czech Republic and Slovakia have had low inflation since they were established in 1993 and Slovakia now uses the Euro as its currency. Consequently, bond yields have been comparable to yields in Euro countries, even briefly turning negative in Slovakia. Figure 4 compares the yields on 10-year government bonds in both the Czech Republic and Slovakia.
Figure 4. Czech and Slovak 10-year Bond Yields, 2000 to 2022
National and Regional Exchanges
Most countries have seen a consolidation of regional exchanges into one national exchange. Euronext is consolidating different national exchanges into a single exchange. However, because of the fissiparous nature of Austria-Hungary, the opposite happened. Several regional exchanges were replaced by a smaller number of national exchanges. Prague became the primary stock exchange in Czechoslovakia and Budapest the primary stock exchange in Hungary.
The Prague Commodities and Stock Exchange was founded in 1871. The Prague stock exchange was closed in 1948 after the government of Czechoslovakia nationalized large private firms. There was no stock exchange in Prague between 1948 and 1993. The Prague Stock Exchange reopened in 1993 and the Bratislava Stock Exchange opened in Slovakia in 1991.
Instead of calculating a single stock market index for Austria-Hungary, we must calculate four stock market indices, one for Austria-Hungary before the 1920s, one for Austria, one for Hungary and one for Czechoslovakia. We can put together a stock index for Czechoslovakia by separating out Czech stocks on the Vienna stock exchange before 1914 from non-Czech stocks and on the Prague stock exchange after 1918. While shares from Czechoslovakia traded on the Vienna Stock Exchange before World War 1, some Czech shares only traded in Prague. After the Empire was broken up, new shares were restricted to their new national borders.
The Vienna Stock Exchange
The Vienna Stock Exchange was founded on September 2, 1771 to trade bonds, bills of exchange and foreign exchange. Austria issued debt to cover the costs of the Seven Years’ War with Prussia and it needed a market for its debt. Raising the debt outside of Austria was proving too expensive, so debt could be issued in Austria and traded on the Vienna Stock Exchange. Until 1817, only bonds and currencies traded on the exchange. In 1818 shares in the Austrian National Bank (Oesterreichsche Nationalbank) were issued and these shares traded not only in Vienna, but in Amsterdam and became the first shares to trade on the Frankfurt Stock Exchange in 1821.
In the 1830s, railroads appeared and absorbed capital in both Germany and in Austria-Hungary. Ferdinands Nordbahn railroad began operating in 1836 and was intended to connect Vienna with the salt mines near Krakow in Poland by crossing Slovakia. The history of Ferdinands Nordbahn shares is illustrated in Figure 5. The stock generally increased in price between the 1830s and 1890s. The railway was nationalized in 1907, although it continued to operate coal mines and other industries in the Ostrava region of the Czech Republic. Before 1900, Ferdinands Nordbahn represented 50%-80% of the capitalization of stocks that listed on the Prague Stock Exchange.
Figure 5. Ferdinands Nordbahn, 1836 to 1943
The Czechoslovak Stock Market
The number of Czech companies listed on the Vienna Stock Exchange rose from 3 in 1871 to 29 in 1912 and to over 60 stocks by 1929. The capitalization of Czech stocks peaked at $72 million in 1872, which was primarily Ferdinands Nordbahn, rose to $256 million in 1912 and to $428 million in 1939. By comparison, the Vienna SE’s capitalization was $748 million in 1871, $1578 million in 1912 and $471 million in 1939. In 2021, the Vienna SE was $163 billion, the Prague SE was $37 billion and the Slovak SE was $2 billion. The relative performance of Austrian, Czech and Hungarian stocks is illustrated in Figure 6. As can be seen, Czech stocks outperformed Austrian stocks, but lagged behind Hungarian stocks.
Figure 6. Austria, Czech and Hungary Stock Market Indices, 1863 to 1918
The performance of Czech stocks on the Vienna SE between 1836 and 1914 and on the Prague SE between 1918 and 1945 is illustrated in Figure 7. As illustrated in Figure 7, Czech stocks peaked in 1845, began their decline, and then crashed during the 1848 revolutions. A second bubble and stock market crash occurred in 1873. The railroad system in Germany doubled in size between 1865 and 1875, and in the euphoria over the unification of Germany, thousands of people invested in the stock market in both Germany and Austria.
During the “Gruenderjahre” which occurred between 1870 and 1873, dozens of new companies came into existence in Austria. The number of companies listed on the Vienna Stock exchange increased from 28 in 1866 to 378 in 1873 while the Vienna stock market capitalization rose from $230 million in 1866 to $748 million in 1873. However, the impact of the stock market bubble on Czech listed companies was much smaller than in Austria and the decline in Czech stocks was much less severe.
Austria-Hungary entered World War I in 1914 and closed the stock market until 1918. After the war, Austria-Hungary was broken up into three countries, Austria, Czechoslovakia and Hungary and parts of the empire were distributed to Poland, Russia, Romania, Serbia and Italy. Many Czech companies that had listed on the Vienna Stock Exchange moved to the Prague Stock Exchange.
Czechoslovakia did not suffer from the hyperinflation that occurred in Austria, Hungary, Germany, Poland and other central European countries after the war. Instead, Czechoslovakia suffered from deflation in 1922 with prices falling almost 40%. There was a bubble in Czech stocks in 1919 that peaked in February 1920, but stock prices collapsed in the deflation that followed in 1921 and 1922. The market rose by 603% between July 1914 and February 1920, but gave up 78% of its value by October 1922. The market then rose until 1929 before collapsing back to its 1922 levels in May 1932. The market rose until 1942 when the Nazis stabilized prices of Czech stocks until the end of the war.
After the coup d’etat in 1948, Czech industry was nationalized by the Communist government and the stock market was closed in 1948. Czechoslovakia was split into two countries on January 1, 1993 and the Prague SE and Bratislava SE reopened in 1993. The performance of the Czech and Slovak stock exchanges since 1993 is illustrated in Figure 8. Both stock exchanges passed through bubbles when they reopened with prices peaking in March 1994. Stocks declined by 69% on the Prague SE after March 1994 and declined by 80% in Bratislava. Stocks recovered between 2001 and 2007, and declined 67% between 2007 and 2009. Stocks traded sideways between 2009 and 2020 and remain below their 2007 peaks in both Prague and Bratislava.
Bull and Bear Markets in Czechoslovakia
If you look at Table 1, you have data on the bull and bear markets in Czechoslovakia between 1836 and 1945. The market moves were quite large, with two bear markets showing declines of over 70% between 1845 and 1848 (70.9%) and 1920 and 1922 (77.9%). However, there were also several bull markets during which stocks rose by over 200% between November 1841 and September 1845 (233%), between April 1848 and January 1853 (287%), between July 1914 and February 1920 (603%), though these increases were driven by inflation, and between April 1938 and December 1942 (207%). Price restrictions under the Nazis stabilized the market between 1942 and 1945.
|
Trough |
Change |
Peak |
Change |
|
04/15/1836 |
|||
|
11/30/1841 |
-41.59 |
9/30/1845 |
233.33 |
|
4/30/1848 |
-70.91 |
1/31/1853 |
287.53 |
|
7/31/1854 |
-33.27 |
06/30/1856 |
82.48 |
|
5/31/1859 |
-53.97 |
5/31/1862 |
64.03 |
|
7/31/1866 |
-33.52 |
6/30/1895 |
156.51 |
|
7/31/1914 |
-16.68 |
2/29/1920 |
603.17 |
|
10/31/1922 |
-77.94 |
3/31/1929 |
147.89 |
|
5/31/1932 |
-57.42 |
3/31/1937 |
162.76 |
|
4/30/1938 |
-31.66 |
12/31/1942 |
206.78 |
Table 1. Bull and Bear Markets in Czechoslovakia, 1836 to 1945
Returns to Czech Stocks
A comparison of returns to stocks in Austria, Czechoslovakia and Hungary with returns in the United States, Germany and the United Kingdom is provided in Table 2. Czech stocks underperformed Austrian stocks, though only slightly, before World War I.
After the war, Czechoslovakia was born and the country had to contend with creating an economy that was independent of Austria and Hungary. Although the economy remained stable, it grew during the 1920s, then suffered from the impact of the collapse in Central European economies in the early 1930s and the rise of Nazi Germany in the lates 1930s. In 1938 Czechoslovakia ceased to exist. Czechoslovakia did not suffer from the hyperinflation that occurred in Austria after World War I and although investors in Czech stocks didn’t earn a return, at least they didn’t lose money as occurred in Austria. Still returns to Czech investors were inferior when compared with the other countries between the wars as Czechoslovakia tried to establish its existence. After the war, Czech industry was nationalized and shareholders lost all their money. Foreign investors attempted to regain the value of their investment in stocks and bonds, but without success.
|
Austria |
Czech |
Hungary |
USA |
Germany |
UK |
|
|
1817-1914 |
6.8 |
7.05 |
4.78 |
|||
|
1836-1914 |
5.2 |
5.06 |
7.64 |
5.5 |
5.06 |
|
|
1863-1914 |
4.49 |
4.9 |
4.08 |
7.75 |
4.99 |
4.22 |
|
1913-1944 |
-5.63 |
0.02 |
5.39 |
8.3 |
7.73 |
6.04 |
|
1863-1944 |
0.64 |
3.13 |
4.95 |
8.04 |
6.81 |
5.02 |
|
1817-2021 |
4.85 |
8.99 |
6.32 |
6.86 |
Table 2. Annual Total Returns to stocks in Six countries, 1817 to 2021
Conclusion
You can break up the performance of Czech stocks into three periods. During the first between 1836 and 1914, Czechoslovak stocks traded on the Vienna SE. When the Prague SE was established in 1871, it acted as a regional stock exchange within the Austro-Hungarian economy. Returns to Czech stocks, if you break them out from non-Czech stocks in Austria-Hungary were comparable to returns to other shares since investors were free to take advantage of the differences in returns.
After World War I, the Prague SE became the national stock exchange for Czechoslovakia and remained a national stock exchange until the country was incorporated into Nazi Germany in 1938 when it became a regional stock exchange within Germany. After the coup d’etat of 1948, industry was nationalized and Czech investors lost all of the money they had invested in Czech companies. The stock exchange was closed in 1948. Whether investors put their money in Austrian, Czech or Hungarian companies, they lost all of their money in Czechoslovakia and Hungary and almost everything, as measured in US Dollars, in Austria. Of course, this was true of all investors in Eastern Europe. Investors in Poland, Bulgaria, Romania and Yugoslavia lost all of their money when the Communist governments nationalized industry.
Data Sources
Data from Austria-Hungary was collected from several sources. The Compass, Kalender und Jahrbuch fuer Handel, Gewerbe und Industrie, provided data on stock prices, dividends and shares outstanding annually from 1868 until the 1970s. In addition to this, several newspapers were used including Die Freie Presse and Wiener Zeitung in Vienna. Once the data on stock prices, dividends, corporate actions and shares outstanding were collected, the GFD Indices for Austria, Czechoslovakia and Hungary as well as Austria-Hungary before World War I were calculated.
Bibliography
Emmerich Back, Die Aktien der Wiener Boerse, Vienna: 1931
Franz Baltzarek, Die Geschichte der Wiener Boerse, Vienna: Verlag Oesterrichischen Akademie der Wissenschaft, 1973
Compass, Kalender und Jahrbuch fuer Handel, Gewerbe und Industrie, Vienna, 1868 ff.
Rudolf Hanll, Aktien Compass der Wiener Boerse, 1924, Vienna: Compassverlag, 1924
Prager Boerse-Compass, 1929, Prague: Compassverlag, 1929
Emmerich Back, Die Aktien der Wiener Boerse, Vienna: Verlag Back, Steuermann & Co, 1931
Dr. Josef von Korosy, Die Finanziellen Ergebnisse der Actiengesellschaften Waerend des Letzten Vierteljahrhunderts (1874-1898), Berlin: Puttkammer und Muehlbrecht, 1901
Julius Michaelis, Deutschlands Eisenbahnen: Ein Handbuch fuer Geschaefsleute, Capitalisten und Speculanten, Leipzig: Amelangs Verlag, 1854, 1859 and 1863
Newspapers: Wiener Zeitung and Die Freie PresseThe stock markets in Prague and Bratislava reopened in 1993 after Czechoslovakia was split into the Czech Republic and Slovakia. Czech GDP is currently about $250 billion and the Slovak GDP is about $100 billion. The combined market cap of the two countries is less than $40 billion. The two countries are small and offer few opportunities for active investment. Although the Czech Republic’s GDP is greater than that of Portugal, both because its stock market opened less than 30 years ago and its stock market is so small, the Czech Republic is treated as an emerging market rather than a developed market.
