CEE equity markets have had a relatively strong start into the year compared to their counterparts in Western Europe. For example, the CECE EUR Index (Poland, Hungary, Czech Republic) is up some +3% ytd, clearly outperforming the Eurostoxx 50 (approx. -4% since Jan. 1). The Hungarian equity market has been the top performer among these three CEE markets with a share price increase of some +12%. This development was also fuelled by positive outlooks of the index heavyweights OTP, MOL and Magyar Telekom, accelerating economic momentum, an unexpectedly early continuation of interest-rate cuts and a reduction of the relatively high bank tax.
To an extent, the friendly market trend is driven by supportive monetary policy effects from Frankfurt and Washington as well as the fact that emerging market investors have regained their risk appetite. The Central European economy is already in its third year of recovery. The CE region is likely to attain average real GDP growth of slightly above 3% also in 2016. Moreover, the recovery is gaining traction also in Southern Europe and private consumption is the main pillar of growth – just like in the Eurozone: for instance, the retail sectors of Poland, the Czech Republic, Croatia and Romania demonstrated strong dynamics at the beginning of the year.
The family support scheme of the new government in Poland should enable a considerable increase in purchasing power and hence accelerate the economic momentum even further. The Polish equity market, by contrast, is still mired by political uncertainty. The financial sector has suffered due to the introduction of Europe’s highest bank tax, and bank shares are also affected by the announced forced conversion of FX loans. At the same time, many investors still frown upon the rescue scheme for the Polish coal industry – which hinges on more or less voluntary support from utilities, banks and insurance companies – and uncertainties due to a proposed special retail tax.
Also the Czech equity market benefited from the continuing strong economic environment only to a certain degree. The market’s underperformance by regional comparison is attributable to uncertainties regarding the dividend policy of index heavyweights CEZ and Komercni Banka, worries about negative interest rates also in the Czech Republic and a profit warning from Vienna Insurance Group, which also has a listing in Prague.
The Russian equity market has been the strongest performer in the year to date. Even though the cyclical deceleration is likely to persist in Russia in 2016, the oil price recovery of the past few weeks has knocked on to a substantial rebound of the Russian rouble and the commodity-heavy local equity market since February. In addition, the government issued an ordinance stipulating that all companies which are majority-owned by the state have to pay out at least 50% of net profit as dividends, giving an additional boost to Russian equities.
In our opinion, the reporting season that is about to start will probably not paint a uniform positive picture of CEE companies. We believe that the quarterly results of regional banks should be quite good across the board thanks to very low risk costs, but earnings trends are likely to be burdened by the low interest rate environment. We anticipate a strong reporting season for industrial companies (e.g. from the Polish chemicals sector), but unfortunately there are simply too few listed industrials in CEE. Utilities still suffer due to the weak electricity price environment, but some energy companies should nevertheless boast good margins in the refinery business and especially in the petrochemicals segment.
Factors that continue to speak in favour of CEE equity markets are stable economies in most CEE countries and significantly lower risk premiums. On the other hand, the outlook is overshadowed by political vagaries – above all in Poland and Romania – and only limited momentum from the 1Q reporting season.
Vice President of ÖVFA
Head of Department Company Research
Raiffeisen Centrobank AG
25 April 2016
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