Christoph Schultes, MBA, CIIA, Chief Analyst, Erste Group Bank AG

Forecasting the market continues to be anything but easy. A possible rate hike by the Federal Reserve, resp. its timing, has weighed on the minds of investors for quite some time. The diverging monetary policies pursued in important global economic areas are eagerly monitored: expansive policy in Europe and parts of Asia, restrictive policy in the US. Questions over short term developments in China's economy have shaped price moves in the most important stock market indices over the past several weeks, resp. months. And this was followed by the VW emissions scandal hitting the markets just as they were entering a small recovery phase. VW's stock price plunged, taking the stock prices of other car makers, resp. of companies associated with the car industry down with it.

Uncertainty among investors is becoming ever more pronounced, but this is happening in an overall environment that actually isn't unfavorable for stocks at all. It doesn't seem likely that anything will change about low interest rates or low commodity prices anytime soon. Investment alternatives are in extremely short supply. Shifting into cash may make sense in the short term, but hardly over the medium to long term. Investors cannot afford missing out on attractive dividends in perpetuity. High dividend yields remain the strongest argument in favor of stocks.

While international indices were able to reach new all time highs in the first half of the year, the performance of the ATX was rather sluggish. The interest of global investors in Austria's benchmark index can at most be called restrained. As a result, the valuations of Austrian stocks continue to be moderate in an international comparison.

The price/earnings ratio of the ATX currently stands at 12x, and while this is equal to the long term average, it isn't pricing in the current low interest rate environment. With a P/E ratio of 12, the return demanded by investors amounts to more than 8%. By deducting the current 10-year government bond yield of less than 1%, which is used as the risk free interest rate, one arrives at a risk premium of 7%. This is significantly higher than the long term average of slightly below 6%. Forecasts of rising earnings for Austrian companies over coming years, which imply further declines in PE ratios, are ignored as well.

The currently favorable prices of stocks in Vienna are by no means a guarantee that prices will rise in the final quarter of this year. For that, the uncertainty of investors is too great and the Austrian market too small. The technical picture isn't exactly arguing in favor of stocks either at the moment. However, it may well be worth one's while to take a look at stocks anyway. Someone investing in stocks at this juncture perhaps won't catch the lows, but will secure an attractive dividend yield for himself and the potential to achieve medium to long term capital gains. Lastly: the seasonally weakest period of the year is behind us as well. In the past five years, October has been the strongest month for stocks. "Remember to come back in October?"


Author:
Christoph Schultes, MBA, CIIA
Chief Analyst
Erste Group Bank AG
1 Oktober 2015

Erste Group Bank AG
ÖVFA - Österreichische Vereinigung für Finanzanalyse und Asset Management

Note

Wiener Börse AG would explicitly like to point out that the data and calculations given in this report are historic values, which do not permit any conclusions as regards future developments or value stability. Price fluctuations and loss of capital are possible in securities trading. The contribution is the personal opinion of the analyst and does not constitute a financial analysis or a recommendation for investment by the exchange operating company, Wiener Börse AG.

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