CEE equity markets
still on track for recovery

Date: 08.04.2011

In international terms, Q1 2011 was marked by the overwhelming catastrophes in Japan and the spread of unrest in the Arab world. While the developments in Japan have caused a great tragedy for the people, the economic impact on the world as a whole seems relatively limited. By contrast, uncertainty over the upheavals in North Africa and the Arab world is directly reflected in rising oil prices. In the light of these events, it is quite remarkable that even though CEE markets have not been able to decouple completely from the above-mentioned global impacts, they have seen more stable performances than international equity markets. In general, CEE indices experienced less serious setbacks than leading international indices during the market downturn while fully participating in the global recovery that followed. Particularly worth mentioning is Southeast Europe (SEE), as this region has been almost unaffected by recent events, managing to post impressive market gains since the beginning of the year. It seems that the European sovereign debt crisis has taken a back seat and the steady improvements in the US economy are likely to help foster a continuing recovery in CEE. In Q2, we expect a generally positive development of share prices and prefer the SEE region and Russia (with an eye to oil prices) over the stock markets in Central Europe.


Source: Raiffeisen Centrobank AG

With a gain of 12.5% in the first quarter of 2011, the Romanian stock index BET underlined the positive development seen on the stock markets in Southeast Europe since the turn of the year. Growing confidence in the economic recovery is being reflected in increasing portfolio investment by non-residents, who have invested a net total of EUR 42 mn in the Bucharest exchange in the last twelve months. The Zagreb stock market was also characterised by rising turnover in the first three months of 2011. During this period, the CROBEX10 was able to post gains of more than 10 %, as domestic institutional investors, who hold about one half of domestic stocks, have stepped up their purchases of Croatian names. Amid good economic conditions, the market stands out with its currently attractive valuation. Serbia’s BELEX15 has also broadly shrugged off the negative global events and managed to post a gain of more than 16 % since the beginning of the year. Factors in favour of this market include the positive economic conditions and the still very attractive valuation. If the global economic environment remains benign, we expect to see positive developments on both the Belgrade stock exchange as well as the exchanges in Bucharest and Zagreb in the months to come.

The Russian MICEX has gained more than 7 % since the beginning of the year and thus performed quite well by international standards. In the current environment, Russia may well be regarded as a safe haven, as both the disaster in Japan and the uprisings in North Africa will mean significantly more direct exports of fossil fuels (e.g. natural gas) on the one hand and higher oil prices on the other. This not only benefits the entire energy sector, but the economy in general. Stronger confidence in the market is also clearly evidenced by the sharp net inflows into Russian equity funds and Exchange Traded Funds since November 2010. Last but not least, the MICEX also looks very cheap in terms of valuation in a global comparison.

In contrast to exchanges in Southeast Europe and Russia, the Polish and Czech stock exchange indices performed rather moderately. With a plus of 2.7 %, the Polish WIG20 only just managed to edge into positive territory in Q1 2011. Along with international developments, several other factors hampered performance on the secondary market in Poland, including numerous anticipated privatisations and the upcoming changes to the pension system. Nevertheless, the economic outlook is quite positive, with anticipated GDP growth of 4 % in 2011 and aggregated earnings growth of 17.2%. With a quarterly plus of 2.7%, the Czech PX has also been lagging behind its peer markets. In fact, we generally see a rather modest performance for the Czech stock exchange, the more so as earnings growth is expected to be very weak this year, at around one per cent.

As to the Central European markets, only the Hungarian stock index BUX was able to show some healthy growth in Q1 2011, outperforming its peers in Poland and the Czech Republic. The Hungarian government has unveiled its long-awaited package of structural reform measures, which means that, now that the market has received this piece of news, we do not expect the Hungarian government to cause further distress.

The following table summarises our index forecasts for the rest of the year.


Source: Raiffeisen Centrobank AG


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