Back in the focus of investors

Date: 07.04.2010

Increasing risk appetite implies that also the relative outperformance of Eastern European stock market indices rises compared to leading Western European stock markets. In the past few weeks, the CEE stock exchanges returned a performance in the mid single digits, while the pan-European EuroStoxx 50 only booked slight gains. Top-performers were the “high-beta” market Hungary and the Warsaw stock exchange characterised by a heavy weight of financial shares, showing increases of about 6% and 5%, respectively. We believe that international stock market trends should remain positive, fuelled by support from the interest rate and liquidity environment, robust economic data and corporate results as well as largely still attractive valuation levels. These factors are expected to enable further share price gains for Eastern European stock markets in the near future.

As expected, Eastern European economies showed clear signs of stabilisation in the last few weeks and months. Following the massive setbacks of growth rates in the region of 6% on average in 2009, we forecast an increase in aggregate economic performance of 3.4%. This positive trend should also be reflected in the earnings trends of listed companies. Consensus estimates currently expect earnings growth of 34% for the region.

As a result of the relatively lower share of public debt as a percentage of GDP in Eastern European countries, the main problem area of country risk – exemplified by Greece and other states in the south of Europe – was less of a burden for Eastern European stock markets during 1Q 2010. Whereas Greece’s public debt amounts to roughly 110% of the national economic output, public debt as a % of GDP of most CEE countries ranges between some 15% (Bulgaria) and some 50% (Poland). The only exception here is Hungary with 80% which is, however, exactly in line with the average of the euro zone countries.

Against the background of the expected positive international market environment we forecast additional capital inflows into the region. In Romania capital inflows of foreign investors amounted to about EUR 40 mn in the first two months. In the same vein, the Romanian stock market by far boasts the best performance with almost +30% since the beginning of the year. We reckon that a similar picture can be painted for the Western Balkan states, where capital inflows were substantially lower due to lower liquidity levels. If the current development continues, the stock exchanges in Zagreb or Belgrade are likely to come more into the limelight and the local share price trends should reflect the capital inflows. For the second quarter we forecast upside potential also for the Russian stock market, which exhibited a below-average performance compared to other indices in the region in the year to date because of the highly weighted oil & gas stocks. The earnings situation of Russian oil and gas companies is likely to improve thanks to tax breaks for the exploration of new oil fields and a stable crude price around the USD 80 mark. The recent 25 bp interest rate cut by the Central Bank of Russia also contributed to an improvement of sentiment. Poland’s excellent economy (it should be noted that a recession was avoided and GDP grew by 1.7% last year) provides a healthy environment for the Polish market. The IPO pipeline is filled to the brim, though, so that some funds might be diverted from the secondary market. Moreover, even though Hungary was one of the markets that benefited disproportionately from the rising propensity to take risk and we believe that this situation will remain unchanged for the time being, the parliamentary elections that will take place in April pose a risk that has to be watched carefully.

Author
Birgit Kuras
Head of Department Company Research and ECM
Raiffeisen Centrobank