The main headline investors read during the last couple of days regarding the Austrian stock market was that the ATX index underperformed in the first half of 2014. That's true indeed, but what are the most important conclusions to draw? Stock market indizes are often just a shallow indicator of stock market performance; few investors actually dig into details. For example, three companies (Erste Bank, Raiffeisen Bank International and Immofinanz, which are heavily exposed to Eastern Europe) together account for around 30% of the index weight. How should these three stocks be compared to the three most heavily weighted stocks in the German DAX index (Bayer, BASF and Siemens)? What would the valuation of that index be if Deutsche Bank, Commerzbank and the likes accounted for around 30% of the index weight? The price perhaps would be clearly lower.
Let's turn to the most important facts. On average, home market is valued at equity book-value. If you take into account already mentioned heavy weights of the index from the banking and property-sector, it looks very attractive on either side – historical and international. One may argue that there must always be one reason, why Banks with high Eastern Europe exposure are valued under book-value; but does that seem rational – especially in the light of OMV? The company's return on equity shows a double-digit figure! For comparison: European markets are valued on a P/B-Basis of 1,7; American equivalent at about 2,6. If you take into account Vienna's market dividend-yield, you will come up to 3 percent; that's nearly twice as much the yield of Austria's long term government bond. Short term interest rates will stay much longer at these low levels; also on the longer end, there is no definite trend reversal. All in all, investors – especially Austrian – still show a striking underweight of equities in their asset allocations. No sign of euphoria! In historical connection, bonds are expensive; equities however are valued with their long term average; on this basis – Vienna looks very cheap.
Experienced investors know that attractive valuations don't require increasing prices! They should rather stick to the Warren Buffets principles: "Price is what you pay. Value is what you get". Of course, there is kind of price reduction, caused by poor liquidity; but to buy reliable companies at fair prices can't be wrong from a strategic point of view. Buffet also mentioned the following metaphor – "games will be won by players, concentrated on the game – not by players concentrated on the scoreboard". The current price of the Austrian Traded Index is an example of a scoreboard and not very meaningful for future performance indications of investors who are committed for the long term. It is far more important to recognize the changes currently taking place on the Austrian corporate playing field. We expect for example, that OMV's strategic decisions will prove right in the long run. We also welcome the declining discounts to book value we currently see at Immofinanz and CA Immo, which reflect the decisions made by the respective management teams. There are more examples – defensive stocks like Post or BUWOG, which are not expected to skyrocket but therefore promise relatively safe dividend yields beyond 4%. But we also appreciate less defensive stocks like AT&S which manage to respond innovatively to permanently changing trends in technology. Finally, there are several companies such as Mayr-Melnhof, Semperit or DO & CO which inhabit leading positions in their respective market segments.
We expect patient investors, who are commited for the long term, to be rewarded by stellar performance – whatever the valuation of the DAX index may look like…
Author:
Alois Wögerbauer, CIIA
Executive of 3 Banken-Generali Investment-Gesellschaft m.b.H.
27 June 2014