The upward trends of most international indices have been broken. The month of September set in motion a consolidation phase for the equity markets. The sentiment was affected by inflation worries, the tightening of the loose monetary policy by the central banks, and fears of possible shocks from China. Headline news came from the troubled Chinese real estate giant Evergrande, i.e. the second-biggest company in the real estate sector (N.B. the latter one accounts for about a quarter of the Chinese economic output). Evergrande’s meagre ROE of 15% compares unfavourably to its USD 300bn of debt. The hesitation displayed by Beijing in bailing out the highly indebted group fuelled uncertainty among investors; at the same time, it is not even clear whether such a strategy would be preferable to a controlled insolvency.
Despite the headwind, the ATX continued its upward trend and recorded a month-on-month gain of almost 1%. The Austrian benchmark index benefited (not for the first time this year) from its composition. Oil & gas was in particular demand in September, with the sector following the upswing of the oil price. Banks and companies from the tourism and leisure sector were in demand as well, extending earlier gains on the back of the gradual (and hopefully sustainable) recovery from the pandemic. In the year to date, the ATX is now up 32% and has clearly outperformed its prominent peers, the Stoxx 600 and the S&P, which have only recorded gains of 14% and 15% so far this year.
Is this reason to believe that the ATX has played its ace? We do not think so, as the regrouping towards value and cyclical shares does not seem to be complete yet. The ATX should therefore continue to benefit from the high weighting of exactly these segments. The low 2021 forward P/E ratio of currently 11.2x cannot be compared to other indices because of the low weighting of the growth segment (Stoxx 600: 16.3x; S&P: 21.3x), but at the same time we wish to point out that this level is significantly below the long-term average of 13.2x. The trend towards positive earnings revisions and the earnings momentum per se also support the Austrian benchmark index and suggest the continuation of the long-term upward trend.
This leaves us with the question of how likely the correction is to last on the international stock exchanges. It is a fact that the equity markets are currently navigating some brisk headwinds. Investors are concerned about rising interest rates amid the current inflation pressure and about the fact that Chinese economic growth is on the decline. However, neither one has come unexpectedly, and also, what reasonable investment alternatives are there anyway? Even the bankruptcy of Evergrande would not cause excessive ripples. We expect the focus of investors to shift back to the reporting season next week, which should support the markets in the same fashion as in Q1 and Q2. Seasonality also suggests we might be re-embarking on the earlier upward trend. In the last quarter of the year, equities are expected to gain more than 5% on average. This projection applies to the ATX as well as the Stoxx 600 and the S&P.
Christoph Schultes, MBA, CIIA
Erste Group Bank AG
6 October 2021
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.