Henning Esskuchen of Erste Bank -
Our view is that stock markets have yet to bottom out and we still expect volatility for some time, together with quick profit taking on past gains. However, nervousness should slowly start to fade. In the best case, a decoupling from the US economy becomes a reasonable theme for markets. We continue to believe that Central and Eastern European markets still have substantial growth differentials to western markets on the cards and this card could be played well within a decoupling scenario.
We believe that the recent ZEW/Erste Bank sentiment indicator yielded a fairly positive view on the current situation, with survey participants holding an improving view on economic expectations for both the Eurozone and CEE. While most participants expect some slowdown in activity, still 20% see accelerating M&A activities. Romania and Poland were mentioned as the most attractive targets, while on the investor side Germany was in the leading position closely followed by Austria, confirming the seamless integration of Austria into the CEE growth story.
We are expecting markets to bottom out, but no immediate take-off afterwards is seen. Furthermore, we think that some more sideward movement should prevail into the second quarter and recommend sticking to liquidity and size, although some positioning for calmer markets in the second half of the year should already be considered. Austria and Poland are seen as the best places to wait for better weather. Within Southeast Europe we would remain cautious, but see Romania as the first to benefit from any broader recovery, once investors are willing to tap smaller markets again. For Russia and Turkey, risk aversion will need to improve considerably before these markets become more favourable again.
CEE markets are expected to experience some slowdown in growth, but mostly in line with maturing business cycles - the Austrian and Polish markets are rated as overweight.
• Austria's 12-month forward price/earnings (P/E) ratio of 10 is significantly below its historical average of 12.9 and the current spread between benchmark yield and earnings yields of 5.9 is much above the historical average of 3.4, implying an overdone risk premium for Austrian equities. CEE growth channeled into the Austrian market will remain appealing.
• Compared with other CEE markets, Poland might appear a bit "expensive" on a P/E of 15.4 on 2008 earnings and also risk premiums for equities are at about the historical average. Under current circumstances, liquidity and size remain strong arguments and Poland remains second after Austria with an average daily turnover of €253m (single counted) in 2007. Assuming a bottom in the second half, the depth of the market could be another argument, in a way that it offers sound second line ideas among small and mid-caps.
• Given the kind of turn-around nature of the entire market, Hungary would be rated as an overweight, but current environment calls for prudence.
• A low weighting for the Czech market appears to be justified within the current market environment, when volatile markets recommend remaining rather in big sized markets.
• Slovenia together with Croatia remain the most demandingly valued markets. Local liquidity should be able to lift prices occasionally again, but within the current environment of risk aversion investors are recommended to stay away, even though a few stock picking opportunities prevail (Krka, Gorenje).
• For Southeast European markets, selective stock picking opportunities remain, but the market overall has still a lot of vision priced in and vision does not sell well these days.
• The notoriously expensive Romanian market has given back a lot of its premium and trades now at P/Es of 13.2 and 9.5 on 2008 and 2009 earnings, respectively. Admittedly, the country runs risks (with regards to current account deficits, corresponding impacts on currency etc.); however, these risks seem acceptable for a market in this stage of development and would have been accepted in any other environment. Foreign investment mostly covers the current account deficit and will contribute to profitability increases and exports in the mid to long term.
• Russia is pretty similar to Turkey: more neutral weight. The change in presidency went smoothly and the political programme recently announced sounds business friendly. As long as uncertainty remains, investments in commodities might remain an option (assuming that recession fears do not massively steer sentiment).
We continue to believe that CEE markets still have substantial growth differentials to western markets on the cards, which could be played well within a decoupling scenario. Of course, CEE markets will also experience a slowdown in growth, but we continue to believe that this will be mostly in line with maturing business cycles.
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