"Central and Eastern Europe (CEE) has so far withstood the turbulences in the eurozone well and developed with pleasing stability," analyses Peter Brezinschek, head of Raiffeisen Research, a unit of Raiffeisen Bank International AG (RBI). For 2012, the Raiffeisen chief analyst expects the CEE region as a whole to record average GDP growth of 2.6 per cent – with 3.2 per cent forecast for 2013. This is a large difference in growth compared with the eurozone, where GDP is expected to fall to minus 0.3 per cent in 2012 and return to growth only in 2013 (0.8 per cent forecast).
The difference in the growth perspectives of the individual CEE regions recorded in the past quarters will also continue in the second half of 2012, according to Brezinschek. "The top performers remain Poland with 2.8 per cent and Russia with 3.7 per cent real GDP growth. Slovakia and Ukraine should also be able to add 2.5 per cent growth each to the pleasing data of the last two years," says the Raiffeisen chief analyst. By contrast, the situation in the Balkans remains less positive in his opinion, with Croatia, Serbia and Bosnia and Herzegovina not expected to show any growth at all in 2012. "This region has been the most negatively affected by the recession in the periphery states of the eurozone. Only a moderate brightening of the economic outlook is realistic in the next year," explains Brezinschek.
Overall, the Commonwealth of Independent States (CIS) will develop the best within the CEE region, with GDP growth of 3.6 per cent in 2012, followed by Central Europe (CE) with 1.4 per cent. Southeastern Europe will record only moderate growth of 0.3 per cent.
For Austria, the analysts of Raiffeisen Research have raised their annual forecast for 2012 to 0.7 per cent on the basis of the surprisingly strong first quarter. The experts expect real GDP growth of 1.3 per cent for 2013.
Budget consolidations in Poland, the Czech Republic, Hungary, Romania and Ukraine
Inflation in CEE will take just as varied a course as growth, according to the experts at Raiffeisen Research. "Consumer prices are at historic lows in Russia, Ukraine and Romania, while the trend is upward in Hungary," explains Brezinschek, who also expects budget consolidations above all in Poland, the Czech Republic, Hungary, Romania and Ukraine. However, the chief analyst notes that the debt levels of the CEE countries – with the exception of Hungary – will be markedly below the eurozone average. According to Brezinschek, a deficit reduction is planned both in 2012 and in 2013.
Moderate strengthening of CEE currencies against the euro
According to Raiffeisen Research, increasing concerns in the eurozone coupled with a weakening euro have led to renewed currency turbulence to the middle of the year: While the Polish zloty and the Hungarian forint have risen strongly, the Russian rouble, the Romanian leu and the Czech koruna have all weakened. "In consideration of the respective monetary policy and the fact that an exit of Greece from the euro is not imminent, we will see a moderate strengthening of the CEE currencies against the euro in the second half of 2012. Exceptions to this remain the Ukrainian hryvna, the Serbian dinar and the Hungarian forint," says Brezinschek, who expects central banks to reduce interest rates in the Czech Republic and Russia only.
Buy recommendation for CEE stocks
From the perspective of Raiffeisen Research, the Eastern European bond markets will be characterised by only slight yield increases in the third quarter. "We see greater fluctuations possible for all maturities only in Hungary, in line with the weaker currency trend. We have therefore set Hungarian local currency bonds to sell," says Brezinschek, who would only like to give a purchase recommendation for Poland at present. As soon as Russian bonds record a rise in yield towards 9 per cent, Brezinschek would also see these as worth recommending again.
On the share side, the recovery potential should also unfold in CEE countries with new global injections of liquidity by central banks. Brezinschek therefore gives a buy recommendation right across the region for the first phase of the summer months, with Vienna, Budapest and Moscow showing the highest price potentials, in his opinion.
Russian shares are favoured by an upward revision in market expectations with regard to profit growth, a rise in the oil price back above the 100 dollar mark in the third quarter, and the attractive underlying valuation. The latter also applies to the Hungarian share index, with the double-digit fall in profit for 2012 already priced in. More decisive, however, is the new political ability to compromise, which makes an IMF agreement more realistic in the late summer.
ATX: Attractive fundamentals as basis for friendly environment at Vienna's Stock Exchange
Although the ATX has conceded most of its gains from earlier this year, given the sovereign debt crisis increasingly taking its toll in Austria too, it held up slightly better than many other indices across Europe in Q2. In general, Q1 reporting proved to be quite robust, especially in Austria, with Andritz, OMV, Telekom Austria, SBO, and AMAG among companies beating Raiffeisen Centrobank’s (RCB) earnings estimates and on the other hand, Strabag, Verbund, Rosenbauer and Zumtobel reporting results below RCB analysts’ forecasts. They expect earnings dynamics on an aggregate level to come down in Q2, due to weaker economic momentum and lower CEE currency levels. What is more, Q1earnings of some index heavyweights (e.g. banks) have been inflated by positive one-offs. Adjusted for one-offs analysts reckon with an aggregated earnings growth of around 9 per cent for the companies in the ATX. This results in a P/E 2012e of 9.5x and a 12 months forward P/E of 8.8x, which is still considerably below the historic average of around 12.
Also based on a current price/book multiple of 0.75x the ATX trades close to its trough levels. While RCB believes that the historic 10 year price/book average of 1.5x is not in sight due to higher capital requirements for financial institutions and in general lower leverage of corporates, RCB’s company research would expect a price/book multiple expansion from these levels as imminent dilution risk for most large caps is not in sight. This view is also supported by putting the expected dividend yield of 4.3 per cent in context with a 10y bond yield of 2.6 per cent.
“In line with global equity markets we do not expect a constant index appreciation, but rather reckon set-backs caused by global growth fears and market sentiment turning on political action regarding tensions in the Eurozone. However, we see further upside between 8-12 per cent in total for the Austrian and CEE equity markets”, concludes RCB chief analyst Stefan Maxian.
Favourites: Erste Grup, OMV, SBO, Lenzing, RHI, Rosneft, PGE, Cyfrowy Polsat
RCB has turned a notch more cyclical for Austrian companies and sees further upside for Erste Group trading at trough price/book multiples. RCB also favours OMV given the analysts’ oil price scenario and expecting strong Q2 figures as well as SBO, Lenzing and RHI among industrial stocks.
RCB company research’s preferred CEE equities are Rosneft as the strongest upstream play in Russia, positively impacted by the recent tax reform, the Polish utility PGE given its improved cost base after recent power plant modernization and the opportunity to cash in a 8.8 per cent dividend yield in August as well as Cyfrowy Polsat due to the ongoing good earnings momentum despite the company’s defensive set-up.
Raiffeisen Bank International AG (RBI) considers Austria, where it is a leading commercial and investment bank, as well as Central and Eastern Europe (CEE) its home market. In CEE, RBI has a dense network of subsidiaries, leasing companies and a series of specialised financial services companies in 17 markets.
RBI is the only Austrian bank to have not only a strong presence in the world’s financial centres, but also branches and representative offices in Asia, the company’s other main geographical market.
All in all some 61,300 employees manage about 14.6 million customers at around 3,100 branches, most of them in CEE (these figures include Polbank).
RBI is a fully consolidated subsidiary of Raiffeisen Zentralbank Österreich AG (RZB). RZB indirectly holds around 78.5 per cent of the shares; the rest account for the free float. RBI shares are listed on the Vienna Stock Exchange. RZB is the lead institute of the Raiffeisen Banking Group in Austria, the largest banking group in the country and group head office for the entire RZB Group, including RBI.