Last year, our optimistic outlook for the Austrian equity market in 2017 was entitled “Lights are on green”. Indeed, the performance even surpassed our expectations. The ATX climbed by some 30% last year; taking into account dividend income, the increase was even 33%. This means that Austria’s leading ATX index was among the strongest performers of developed-market equity indices worldwide last year. The DAX, by comparison, increased by 13%, the EuroStoxx50 by 10% and the Dow Jones Industrials by 12% in EUR terms (+28% in USD terms). For the ATX, last year’s rise marked the strongest gain since 2009 (+52%). There were five years in which the leading index of the Vienna Stock Exchange posted a performance in excess of +30% since 1990: 1993, 2003, 2004, 2005 and 2009.
The outperformance of the ATX was fuelled by the brimming Austrian economy (GDP growth 2017e: 3.2%), continuing strong CEE economies and hence regained confidence in the region, better sentiment towards financials (which have a high weighting in the ATX; banks and insurers benefit from a steepening of the interest-rate curve) and particularly the strong performance of index heavyweight OMV.
The economy is likely to provide tailwind both for Austria and CEE, albeit at a somewhat declining pace. For Austria we anticipate GDP growth of 2.6% and 1.6% in 2018e and 2019e, and the CE region (PL, HU, CZ, SK, SL) is expected to achieve GDP growth of 3.8% and 3.5%, respectively, after 4.2% last year. For the SEE region (HR, BG, RO, SE, BH, AL, KO) economic growth should come to 3.7% and 3.3%, respectively.
While some companies with US exposure (e.g. voestalpine, SBO, Lenzing) may benefit from the US tax reform, we do not anticipate tailwind for exporters within a one-year horizon due to the strengthening USD. On the other hand, we expect CEE currencies (CZK, PLN) to appreciate moderately and forecast higher interest rates in these countries, which should support financial service providers in the region (Erste Group, Vienna Insurance Group, Raiffeisen International).
The new Austrian government might have potential for surprises. The planned tax relief of families has positive effects on consumption. During the election campaign the parties also promised a reduction of the corporate income tax rate for retained earnings and investment stimuli by enabling higher flexibility in depreciation, but they are not on the agenda in the short term. There are plans to evaluate these measures in connection with a structural tax reform planned for 2020.
In the wake of the strong economic development we forecast robust earnings growth of Austrian companies to the tune of some 8% in 2018 (after roughly 30% last year). This implies that the ATX is currently valued at a P/E ratio of about 13.6 for this year, which is already above the long-term average of around 12 within a one-year horizon. Compared to the Austrian government bond yield, the ATX is still valued slightly below the long-term average, though.
The strong performance of the past few weeks limits the scope for positive surprises in the months to come because we do not expect any major revisions of earnings estimates for 2018e and 2019e. As a result, we do not anticipate the valuation of the Austrian equity market to rise further. This is also reflected in the hefty share price reactions after several cyclical companies published guidance figures that were less optimistic than analyst expectations (e.g. Wienerberger, Palfinger, Zumtobel). Additionally, the reduction of monetary stimuli is expected to increasingly weigh on equity markets as the year progresses. Therefore, we only expect “a little encore” this year and reckon that the Austrian equity market will perform in line with the expected corporate earnings growth rate of some 8%.
Author:
Stefan Maxian
Vice President of ÖVFA
Head of Department Company Research
Raiffeisen Centrobank AG
16 January 2018
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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.