COMMENT: CEE remains Europe growth engine despite slowdown

By bne IntelliNews October 1, 2012

Raiffeisen Bank International -

--CEE with 2012 GDP growth of 2.4%; GDP in Eurozone to shrink 0.5%

--In terms of reforms, CEE tops Eurozone peripherals

--Poland as "safe haven" on CEE and European level

--Stock recommendations: RHI, Immofinanz, Eurocash, Cyfrowy Polsat, Magnit

"We witness that Central and Eastern Europe (CEE) generally and particularly its currencies become increasingly attractive for investors - especially compared to the Eurozone and the euro," states Gunter Deuber, head of CEE Research at Raiffeisen Research, a unit of Raiffeisen Bank International (RBI).

He sees the reasons for these developments in the fact that since 2009 most of the countries in CEE have moved forward with massive adjustment programmes to adapt to the new financial and growth environment, whereas the peripheral Eurozone countries waited far too long. "One point that deserves special attention is the sharp decline in domestic final demand, which has helped to radically reduce unsustainable current account deficits," Deuber explains.

This long-term improvement is also solidly supported by flexible labour markets and the still favourable cost structures compared to productivity, while the credit crunch in the Eurozone has essentially not affected the CEE countries.

Nonetheless, Raiffeisen Research recognises a trend towards weaker economic performance that is also visible in CEE due to the growth problems at the global level. In particular, the countries in the Balkans, Hungary, the Czech Republic and Slovenia have all been hit by recession. "Russia, Poland and Slovakia are doing better in terms of economic growth, but the rates of expansion are decelerating in these countries as well," Deuber notes.

In comparison to the Eurozone, it becomes evident that CEE remains Europe's growth region: according to Raiffeisen Research, CEE as a whole is about to post real GDP growth of 2.4% in 2012 and of 2.9% in 2013. In contrast, GDP in the Eurozone is expected to contract 0.5% in 2012 and to post only moderate growth of 0.2% in 2013.

Poland's resilience tested again

Although the Polish economy is likely to continue its soft patch that became visible recently, in the quarters to come RBI's analysts expect the economy to avoid recession by a comfortable margin - like in 2009. They forecast GDP growth at 2.5% for both 2012 and 2013. "It is important to stress that Poland is also an outperformer in terms of public finances", says Marta Petka-Zagajewska, chief economist at Raiffeisen Bank Polska.

Together with Germany, Poland is among the few major European economies with a fairly liquid public debt market where the public debt level in relation to GDP is about to peak and where a decrease of public debt is a reasonable scenario for the years ahead. "Therefore, it comes as no surprise that Poland was able to establish itself as a 'safe haven' on a regional CEE level and up to a certain extent even on a broader European level", she adds.

Austrian economy drawn down by the Eurozone

The Austrian economy is also paying the price for the dismal economic developments in the currency union. RBI's analysts project a GDP growth for Austria of 1% for 2012 and of 0.9% for 2013. In general, they expect to see increasing economic momentum as 2013 progresses. This result still leaves Austria in significantly better shape than the Eurozone as a whole.

Raiffeisen Research's analysts revised their inflation forecasts upwards from 2.3% to 2.5% for 2012 and for next year to 2.3% (previously, 2.0%). This is mostly the result of increased oil and food prices, which is already clearly visible when looking at prices of weekly purchases of an average consumer.

Temporary corrections for CEE currencies coincided by lower interest rates

With the gradual onset of a recovery for the euro, some of the CEE currencies may lose ground until the end of 2012. Nevertheless, analysts view this as a temporary interruption, as 2013 should be marked by rising exchange rates when the economy begins to build positive momentum again. Raiffeisen Research expects the central banks in the CEE countries to ease monetary policy and that most of them will thus also lower the interest rates. One of the goals in this regard is also to support lending growth in CEE.

Raiffeisen Research's analysts see the outlook for the CEE bond market as somewhat subdued for the quarter ahead, but with the ECB's intervention on the government bond markets, the strongest movements should now be over. "Consequently, we forecast mild increases in yields for Poland, Hungary, the Czech Republic and Russia," states Deuber.

Turning to equities, Deuber still expects to see some headwind from the economy, but the rising risk tolerance for equity investments in the established markets should also have a tangible impact in the CEE markets. In the short term, he recommends a more defensive approach to markets and sectors; over the medium and long term, he still sees good chances for the cyclical rally in the CEE region to continue. This should be beneficial for high-growth markets such as Russia and Poland.

For the third quarter, Stefan Maxian, Chief Analyst at Raiffeisen Centrobank (RCB), says: "We reckon with weaker sales trends, but anticipate positive effects on profitability due to the stronger local currency. As for 2012, we forecast a change in aggregated WIG20 earnings of minus 12%, which translates into an index price/earnings (P/E) of 11."

Looking ahead to 2013, the analysts of RCB forecast a flat earnings trend (plus 1%). Their WIG20 Index target for December 2012 is 2,500 points, which implies a "hold" recommendation at the moment. Within a 12-month horizon, the index is seen at 2,650 points. RBI analysts believe that the outlook for bonds is slightly more negative compared to equity investments.

While on average second-quarter results were in line with expectations in Austria, most companies have turned considerably more cautious in their outlooks. Accordingly, analysts have scaled back their ATX earnings growth estimate adjusted for one-off effects for 2012 from 9% to about 6%. RCB Chief Analyst Stefan Maxian points out that, "earnings growth is expected to come to roughly 12% in 2013, fuelled by lower risk costs of banks, the strong current order backlogs of Andritz and SBO as well as positive effects from asset disposals at real estate companies". As a result, the P/E ratio is expected to be 11.1 for 2012 and 9.9 within a 12-month horizon. This means that the P/E ratio is still below the historical average of some 12.

RCB's ATX Index target for December 2012 is 2,250 points, which currently translates into a "hold" rating for the Austrian market. Within a 12-month horizon, the analysts of RCB anticipate an index level of 2,420 points. Political action at EU level and central bank measures regarding the euro debt crisis continue to call the tune of the market. Even though stronger economic headwinds can be expected in the next months as mentioned above, the sustainably low interest rate level in particular still speaks in favour of equity markets. It should be noted that the dividend yield (3.6%) remains clearly above the yield of 10-year bonds (2.1%).

From among the Austrian recommendations of RCB Company Research, RHI is preferred due to its current earnings momentum and low valuation and Immofinanz because of its compelling dividend strength (currently 5.7%) and a potential spin-off of the Austrian and German businesses.

AT&S is attractive given the group's regained high capacity utilisation and strong market position in printed circuit boards for smart phones and tablet PCs thanks to the capacity expansion in China.

Based on the current macroscenario for Poland, RCB analyst Bartlomiej Kubicki recommends a rather defensive portfolio structure. Moreover RCB Company Research would overweight companies which benefit from the relatively strong local currency, such as Cyfrowy Polsat. Eurocash appears particularly attractive due to expected market share gains, synergies from the acquisition of Tradis and positive index effects from the higher free float. In Russia RCB's analysts currently have the local shares of retail chain Magnit (successful course of expansion) as well as Rostelecom and Rosneft on their list of recommendations.

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