Assessment of equity markets in CEE

Date: 4 January 2012

During The year 2012 confronts investors with enormous challenges. Assuming that the year will end positively for equity investors, however the volatility levels that we could see will remain considerably high.

The sovereign debt crisis will not be solved easily and fast. Moreover it will be important to come up with long term solutions and structural measures instead of short term steps. The Central Banks worldwide will remain expansive. This said all monetary measures will support equity markets in general.

Corporate earnings could show a similar path as we have observed in 2009. In that year sentiment was also very bad in the beginning, with a nice recovery path from these low levels at that time.

Our equity research of ERSTE GROUP is cautiously optimistic for the equity markets in Central and Eastern Europe. The ZEW/Erste sentiment indicator supports this view, as a majority considers equities as more attractive than in 2011 and additionally stock exchanges in CEE are valued more interesting than the equity markets in the Eurozone. However, outflows out of emerging-market-equity funds worldwide amounted to 41 bn US$ at the end of November – a similarly high level as in 2008. A turnaround from this trend cannot be expected very soon.

Valuations in general do not produce a clear buy signal. On the one hand the equity markets in CEE are attractively valued based on historical levels. But with respect to earnings growth, the equity markets of the region are trading more at „fair value“.

The real economies in the region of CEE weakened. Although the third quarter of last year showed some positive special effects (esp. in the agricultural sector), for the fourth quarter deterioration cannot be avoided. The reason for this development is the spill over effect from the Eurozone crisis, which indirectly affects the region in CEE by reduced demand for their products. Especially for Hungary and Croatia we expect for the whole year a recession and for the other countries rather a bleak outlook. The strongest drop in growth must be expected for Turkey.

From point of view of our research department the core interest rates will remain rather stable, even with an outlook for lower inflation rates. The weak currencies will in addition not allow for significant changes of the interest rate policies of the respective Central banks.

With respect to fiscal policy some governments in CEE have already reacted to the results of the EU-Summit in December. It is probable that Romania, Poland and Czech Republic will follow the financial pact. Except Hungary, all countries will reduce their budget deficits in this year.

Our equity research of ERSTE GROUP expects that the stock exchanges in Turkey and Russia will outperform their peers in the region. Czech Republic and Poland are considered „neutral“, with Hungary seen as the most challenging stock exchange in this year.

The risks of the Turkish market are immanent, however the negative sentiment towards this stock market seem to be overdone. Turkey does not depend so heavily on the EU and could surprise during the course of this year.

Russia is also valued positively. This is the result of the attractive valuation and earnings trend of the listed companies. However, due to the political developments a clear decision cannot be made easily. Furthermore the high dependency from the rather bleak oil price has also be taken into account.

In total we expect for the equity markets in Central and Eastern Europe a positive result in 2012, even though the fundamentals remain in the beginning of the year rather weak but with good potential for improvements during the course of the year.

Author:
Paul Severin, President of ÖVFA
Investment strategist Erste Asset Management