The month of September delivered modest gains to most stock market investors. The S&P 500 Index rose by 0.4%, while investors in the Euro Stoxx Index had to make do with a gain of 0.2%. At first glance the 1.5% rally in the ATX appeared to be more satisfying, but the Austrian benchmark index was merely able to make up for part of the losses it had suffered in August. In contrast to our American colleagues, who seemingly delight in new highs at ever shorter time intervals, European investors currently see at best a kind of solidification of the prevailing sideways channel.
Investors have become accustomed to the never-ending issues of Brexit and trade wars by now, but recently a fresh disturbance is giving them headaches. The government of our southern neighbor Italy is putting the “pedal to the metal". The first details of the 2019 draft budget - which is entirely in line with the government's election promises - were made public with a slight delay and caused quite a stir. The government's draft budget envisages an annual budget deficit of 2.4% for the coming three years, which neither the EU Commission nor investors fancy much. On the final trading day of September the Italian stock market slumped by more than 4%, primarily weighed down by bank stocks, which in turn put strong pressure on the entire European banking sector.
Ironically, European banks were one of the sectors trading in positive territory by the end of September and were actually in the process of regaining the ground they had lost in August. As a reminder: in August the crisis in Turkey triggered stock market declines, with particularly steep losses inflicted on Spanish and Italian bank stocks. While the losses suffered by Austrian bank stocks remain limited, they didn't escape completely unscathed and are therefore unable to lend support to the ATX Index.
The biggest winners among the constituents of the Austrian benchmark index in September were DO & CO and Verbund, with both posting gains in excess of 20%. While the share price of the former was boosted by the long-awaited signing of contracts with British Airways and Iberia, sweetening DO & CO's recent inclusion in the ATX, Verbund was driven by the uptrend in electricity prices, which has already caused the stock to rally by more than 100% since the beginning of the year. Among the biggest losers were Lenzing and AT&S, whose shares posted double-digit losses. Upon closer examination both companies are victims of the trade dispute between the US and China.
As is well known, usually the future has already arrived before anyone expects it to. More than ever this seems applicable to equity markets, and making a forecast for the fourth quarter is difficult. From a seasonal perspective the final quarter of the year should be favorable for stocks. In the past three years the ATX has posted an average gain of 6.5% over this time period. This year things are bound to be a lot more complicated, at least if one considers the technical setup. Austria's benchmark index currently trades just below its 200-day moving average. Attempts to overcome this resistance have already failed twice in the past two months. From a fundamental perspective the valuation of the ATX stands noticeably below its historical average, as the index trades at a P/E ratio of just 11.4. The implied risk premium has evidently increased significantly, but this is hardly a surprise considering recent economic and political turmoil around the world. An absence of negative news-flow would seem to be an essential prerequisite for a year-end rally in European stocks, but this is something we cannot really bring ourselves to believe in at the moment.
Christoph Schultes, MBA, CIIA
Erste Group Bank AG
4 October 2018
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