Russian rebound not seen lasting but CE offers potential

By bne IntelliNews May 30, 2014

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The May boost for Russian and Turkish equities and currency is unlikely to last, suggest analysts at Capital Economics. However, there there are reasons to be relatively upbeat about the prospects for Central European stocks and currencies, they add.

Russia's equity market has outperformed the rest of the region over the past month. Following conciliatory remarks from the Kremlin pledging to respect the outcome of Ukraine's presidential election, the stock market has risen by over 15%.

Financial markets in the rest of the region have performed pretty well too. All stock markets have posted gains, with Turkish equities up by around 8% over the month. Nonetheless, the increases in Turkish and Russian stocks (the region's two largest markets) over the month haven't fully reversed previous losses.

For Russia, the crisis in Ukraine is by no means over, as highlighted by the recent upsurge in violence, the analysts note. "Moreover, the weak economy, a dwindling current account surplus and persistent capital outflows mean we remain downbeat," they add. "Meanwhile, Turkey's external vulnerabilities mean that it will be among the most exposed EMs as attention turns to the timing of the first interest rate hike in the US."

However, stocks and currencies in Central Europe offer potential for gains, the analysts say, on the back of the ongoing recovery in the economies of the Czech Republic, Hungary and Poland. Low equities pricing and strong state finances are behind the potential.

"There are reasons to be relatively upbeat about the outlook for financial markets in Central Europe," they write. "The growth outlook in these economies is improving, while 12-month trailing PE ratios [a common form of valuing shares which looks at pricing compared with earnings] are below their long-run averages (with the exception of Hungary)."

"At the same time," the report continues, "small current account deficits (in some cases surpluses) and the fact that real effective exchange rates are below their long-run averages, mean that we expect currencies to strengthen against the euro over the rest of this year."

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