Friedrich MostboÌck of Erste Bank -
Overall, we continue to expect some rather uninspiring sideways movement for the rest of the year. Nevertheless, the news from Dubai did prove two things. First of all, the crisis is not over yet and further surprises might be waiting for us down the road. Growth should be looked at carefully, and sustainability remains the challenge. This might be also the guidance for some Asian markets, which have delivered quite some impetus to overall emerging market developments. Secondly - this is the positive news - markets still "want" to remain positive, and sentiment has been strong enough to help equity markets digest the disturbance from the Middle East rather quickly - so far. However, in case of further positive news flow such as recent US employment data, we might even have a chance for a moderate year-end rally.
GDP data released for the third quarter indeed confirmed our categorization of CEE countries into two groups. Czech Republic and Slovakia did suffer from the sudden decrease in exports and bottomed out earlier this year, in contrast to Romania, Hungary, Croatia and Serbia, where adjustment of external imbalances hindered this early bottoming out. Consequently, this situation will also influence expected growth in 2010. The first group should have recovered early enough to see year-on-year growth in the first quarter of 2010 and reasonable fiscal-year growth. Poland remains in a class of its own, totally avoiding recession.
The ZEW/Erste sentiment indicator has basically been showing ever-improving economic expectations since its low in October/November last year. In the latest survey, the outlook for the next six months remains clearly positive, but nevertheless the balance has lost about 20 points for CEE. Given the earlier strong base effect fading out now, we do not see this as too alarming, but rather as a reasonable judgment. At the same time, the current situation has started to improve, while in total still remaining on a negative balance. We would see this as further proof of the base effect argument for long-term expectations. In particular, the current situation in Poland is seen as improving nicely, while unsurprisingly, Hungary is still at the bottom of the list. Expectations on inflation have continued to rise as well, this time with the Czech Republic and Austria taking the lead. Summing up, sentiment remains positive overall, but expectations on stock market performance have again become more sober.
Flowing the right way
For fund flows, the positive picture for emerging markets continues, with October again bringing nice inflows for global emerging markets as well as for regionally dedicated markets including CEE. Hence, the total inflows for all dedicated emerging market equity funds have reached a total of $66bn, more than compensating for the outflows seen in 2008. Both developed markets as well as emerging markets enjoyed net buying in October, while emerging markets outperformed developed markets by far, based on this measure. In terms of allocations/weightings, Turkey and Russia lost some stature, mostly to the benefit of Poland, while other markets in our region gained very moderately or remained flat.
Valuation-wise, markets have calmed down a bit in recent days. The consensus forward price/earnings ratio (P/E) is back to its long-term average for the region. While already exceeding implied fair valuations based on risk premiums, recent corrections have brought CEE markets back to what may actually be a slight undervaluation, with the exception of Poland. Overall, implied P/E based on spreads between earnings yields and risk free rates indicate a slight undervaluation of about 6% for the region. Here, the Austrian and Czech markets offer the highest implied undervaluation of 7% and 14%, respectively.
Among our top picks, we see some interesting possibilities in the media sector. We would argue that expectations for ad market declines and reductions in advertising spending have actually exceeded the levels suggested by the GDP decline. Our favourites are Agora and TVN, while our previous darling, CME, was downgraded from 'Buy' to 'Reduce', with its recent rally exceeding its short- term potential.
We also remain positive on the technology sector. Consequently, we remain buyers of Kapsch TrafficCom and have upgraded S&T and Asseco Poland to 'Buy'.
While we mentioned earlier that the air is getting thinner for basic resources and chemicals, we remain positive on Semperit, voestalpine and RHI, which should all still have some more headroom in terms of their respective target prices. Voestalpine posted fine quarterly numbers, and its steel division is already back to 100% capacity utilization, while its specialized steel division is expected to follow with some delay. Semperit not only presented sound quarterly figures, but the outlook for its Sempermed division remains appealing, with further capacities planned.
With losses on revaluations potentially coming to an end, we also still see some possibilities in the real estate sector, namely ECO Business-Immo and S-Immo.
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