Peter Szopo of Erste Asset Management -
In the autumn, economic growth in Emerging Europe surprised on the upside: quarterly GDP growth accelerated in Poland, turned positive in Romania, remained stable in the Czech Republic and Slovakia, and slowed only marginally in Russia. That said, the broader economic backdrop for the region remains feeble. Slowing Eurozone growth, the US Federal Reserve’s gradual shift away from super-loose monetary policies and, most importantly, the fallout from the Ukraine crisis are weighing on the sentiment and outlook.
Forecasts for the region’s main economies have been drifting lower as of late. Since summer, consensus estimates of 2014 GDP growth fell by about a quarter of a percentage point to 3.1% in Poland, 3.0% in Turkey and 2.9% in Romania. In Russia, where most of the downward shift in expectations already took place in the first half of the year, the latest forecast for 2014 is 0.3%. Unsurprisingly, the Ukrainian economy is the one suffering the most. GDP is expected to be about 10% down this year, although with Crimea gone for good and two important districts no longer under the sway of the federal government, data quality is likely to be low. Only the forecasts for the Czech and Hungarian economies have been resilient, although monthly industrial production data point to a slowdown in these two countries as well.
Against this backdrop, the third-quarter earnings season – more or less completed in Turkey as well as in Central and Eastern Europe (CEE), but still ongoing in Russia – was unlikely to bring a firework of positive surprises. And it didn’t.
In CEE as well as in Turkey the ratio of positive surprises (actual results beating forecasts by 10%) and negative ones (actuals falling short 10% or more) was balanced. In most sectors the balance between positive surprises and disappointments was fairly even, with the notable exception being the consumer sector. Consumer stocks in both CEE (Jeronimo, Eurocash, LPP) and Turkey (Bimas, Migros, Teknosa) failed to inspire. Saying that the investment case for the consumer sector has been damaged would be an overstatement, but third-quarter results show the sector is struggling to transform decent top-line expansion into adequate earnings growth.
Russia is halfway through the earnings season. Many key stocks – particularly the main banks, some oil majors, MTS – are still due to report. Moreover, a number of important companies (eg. Uralkali, Norilsk Nickel, the gold majors) only report semi-annually and provided only production updates for the third quarter. Any verdict on the earnings season, therefore, is only tentative.
At least results, so far, do not point to a massive deterioration in the operations or balance sheets of Russia’s corporate sector. Unsurprisingly, metal and mining companies are beneficiaries of a weaker ruble, with Severstal, NLMK, Rusal all posting strong results. Also – and a bit more surprising – most food retailers delivered a robust set of financials, as well as Qiwi and Yandex, Russia’s leading search engine. On the other side of the spectrum, Rosneft and Novatek, the only oil and gas stocks that reported so far, released unconvincing results.
Earnings forecasts for the full year and their revisions are strongly influenced by the current currency volatility. In Russia and, to a lesser degree, in Turkey, earnings in local currency terms showed even a rising trend since the beginning of the third quarter. However, in dollar-terms earnings-per-share (EPS) forecasts headed south – moderately in Turkey, massively in Russia – due to the ruble weakness. In CEE3 (Czech Republic, Poland and Hungary), forecasts performed even worse than in Russia, regardless whether expressed in dollar or euro (using it as a substitute for local currency in CEE3).
Expectedly, the third-quarter reporting season is not changing the lacklustre earnings dynamics across all three markets – CEE3, Turkey, Russia – for the full year. In dollar terms. Russia is expected to post the steepest fall (-24%) following two years of modest earnings growth, while profits in CEE3 are estimated to fall by 11% and in Turkey by 7%. Particularly, CEE3 has had a poor earnings performance for four years in a row.
At present, the sell-side consensus implies an earnings recovery in 2015 across the region – which, in fact would be the first year since 2010 with positive earnings growth in all core markets. This could be a welcome support for stock markets in the region, but given global growth risks as well as currency and oil price volatility, investors will likely want to see a decent fourth quarter before buying into next year’s earnings rebound.
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