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CESEE Equity Market: Upside Trend after Slow Start

Published: January 7, 2013; 12:34 · (Vindobona)

Country allocation: An overweight on Russia is a strong bet for the coming quarter and mostly based on liquidity searching for an option after Turkey performing so strongly, Erste Group says.

CESEE Equity Market: Upside Trend after Slow Start / Picture: © Vindobona.org

CEE Equity: slow start in January, stronger upside to kick in later in 1Q

CEE/SEE performed pretty well in the final quarter of 2012, at least when looking at the Czech Republic and Slovenia, Serbia going through the roof, while Croatia’s performance has confirmed Erste analysts’ bearish view. Poland also did better than expected, probably receiving more impetus from monetary easing. “We are actually pleased that Romania did so well, while our main reservation has been liquidity. Finally, calling Turkey a sound overweight has been definitely the right call, while Russia disappointed”, summarizes Esskuchen.Erste Group is the leading financial services provider in Central and Eastern Europe. Around 50,000 employees serve 17 million clients in 3,100 branches in 8 countries (Austria, Czech Republic, Slovakia, Romania, Hungary, Croatia, Serbia, Ukraine). As of 30 September 2012 Erste Group has reached EUR 217.0 billion in total assets, an operating result of EUR 2,618.5 million and a cost-income-ratio of 51.9%.

In general, analysts expect a rather slow start for 2013 after markets closed the year 2012 so strongly. Soft consolidation could then face a clearer picture on what’s on the growth outlook, establishing the basis for markets taking a second wind. “Taking profits and consolidating a bit would be nothing negative in our view, in particular since we believe that it was mostly a change in the view on risk that has been moving markets. We tend to see stronger upside to kick rather later in 1Q 2013, in particular,” explains Esskuchen.

Economic Sentiment improving for Romania

The latest ZEW/Erste sentiment indicator for CEE1 shows that economic expectations for CEE within the next six months have slightly worsened. For Czech Republic, Poland, and Slovakia, the experts still rather expect a stabilization of the economic development in the next six months. Hence, the assessment of the current situation in Slovakia and Poland is rather balanced or positive. Economic sentiments have significantly improved for Romania. Experts’ assessment of the current economic situation has improved for Croatia, Hungary, and Romania.

“Our strongest call is certainly the switch from Turkey towards Russia. Romania and SEE (namely Serbia) might benefit from their status of frontier markets, assuming the overall view on risk remains positively biased. We remain rather cautious on Poland, with fundamentals certainly not creating a positive case. For Austria and CEE we remain cautiously optimistic, but again expect some consolidation after strong showing in 4Q 2012,” explains Esskuchen.

Austria – neutral

Risk should remain a compelling driver for the market since it carries one of the highest equity risk premia - of course also owed to low yields. The market runs still some 700 basis points extra return for equity investments and the search for return besides weak bond markets could well lead towards the Austrian market. While we expect the market to rest after the strong closing in 2012, we rate Austria a bit softer than last time.

CEE – sound neutral

The group of markets consisting of Hungary, the Czech Republic and Slovenia comes in at a slightly positive rating. Consensus expectations for earnings growth in Slovenia are surprisingly strong, reasonable for the Czech Republic, but rather weak for Hungary. In case of the latter, expectations have decreased with the still high political risk on top of this. Monetary easing, quite likely will continue in Hungary, but most of that potential might have been used already. The Czech Republic, with recent dividend yields and its major blue chip, CEZ, still punished too much might be able to make a difference again.

Poland – neutral to underweight

Poland is not only the most expensive market in this region, but it is also already trading above its historical valuation levels. Growth outlook so far is the weakest among all its regional peers while liquidity is not expected to make much of a difference. A continuation of monetary easing should be supportive. Hence, we confirm the weak neutral call.

Romania and Bulgaria – moderate overweight

Fundamentals look decent and consensus earnings growth improved quite nicely recently. As long as the political situation refrains from interfering with the market too much, additional liquidity might find its way into that market. Erste Group is the leading financial services provider in Central and Eastern Europe. Around 50,000 employees serve 17 million clients in 3,100 branches in 8 countries (Austria, Czech Republic, Slovakia, Romania, Hungary, Croatia, Serbia, Ukraine). As of 30 September 2012 Erste Group has reached EUR 217.0 billion in total assets, an operating result of EUR 2,618.5 million and a cost-income-ratio of 51.9%. Risk of course remains high and as soon as we see a major deterioration in overall sentiment, Romania immediately would have to pay its toll for being a frontier market.

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