CEE riding the global liquidity wave



  • Austria: weaker economic growth due to reform backlog
  • Good GDP dynamics and low inflation in most CE and SEE countries
  • Markets react less on the ongoing conflict between Russia and Ukraine
  • Industries in focus: oil, real estate, banks and industrials

“In Austria the acceleration of business cycle dynamics seen in the second half of 2013 did not continue in the first three month period of the current year, as real GDP growth decelerated from 0.4 per cent q-o-q in Q4 2013 to 0.2 per cent q-o-q in Q1 2014. External trade still plays an important role for Austria, whereas the recovery in domestic demand has faltered,” starts
Peter Brezinschek, Chief Analyst of Raiffeisen Research at Raiffeisen Bank International AG (RBI) his presentation of the strategy “Austria & CEE” for Q3 2014.

“The leading indicators continue to signal a further increase in economic activity in Austria, even though the strength of the economic recovery will be lower than in previous phases of revival. We therefore had to lower our GDP forecasts for 2014 and 2015 by 0.2 percentage points each to 1.3 per cent and 2.1 per cent, respectively. As a result, Austria’s development is now only average in the euro area and continues to fall behind Germany and Switzerland. In order to regain a more sustainable growth it would be necessary to implement reforms in the area of tax quotas and pensions, as well as reforming the state, the administrative and the healthcare system. We also see a legitimate call for a reduction of the tax burden on labour, although its funding has to mainly come from spending reductions. With a tax quota of 45.3 per cent, Austria has the fifth highest tax quota in Europe - even higher than the one in Sweden. This high tax quota is not only a competitive disadvantage, but also a growth drag when compared to Germany and Switzerland,” continues Brezinschek.

Good GDP dynamics and low inflation in most CE and SEE countries

At the beginning of this year, the CEE* region surprised with solid GDP growth, which led the analysts of Raiffeisen Research to raise the 2014 forecasts for the entire CE region. The forecast for Poland (up by 0.2 percentage points to 3.3 per cent), the Czech Republic (up by 0.3 percentage points to 2.6 per cent), Slovakia (up by 0.5 percentage points to 2.7 per cent) and Hungary (up by 0.7 percentage points to 2.7 per cent) were adjusted upwards. The growth expectation for Slovenia was even raised by 1.5 percentage points to 1.0 per cent, which would mean the long awaited end of recession in the country. In SEE, the positive development throughout Q1 2014 in Romania was so strong that the analysts could adjust their forecast for the 2014 GDP growth by 1.2 percentage points to 3.5 per cent.

“For the majority of CEE countries, one positive aspect is that domestic demand, both in the form of private consumption and private investment, is increasingly responsible for economic growth. In most CEE countries inflation has dropped to historical lows. However, we expect this trend to turn around towards rising inflation rates during the second half of the year,” analyses Brezinschek the current developments in CEE’s economic growth.

In the field of monetary policy, the low inflation rates in several CEE countries have also paved the way for historically low levels of interest rates. In conjunction with the extremely expansive monetary policy being pursued by the European Central Bank (ECB), which will likely continue its generous supply of liquidity for the foreseeable future, no changes in key rates are expected in the CEE region until early 2015. In Hungary however, the downward cycle in interest rates which has been seen in recent years may come to an end at 2.2 per cent this summer. By contrast, Raiffeisen Research does not believe that there will be more rate hikes in Russia, as the central bank has stemmed the tide of RUB depreciation.

Markets react less on the ongoing conflict between Russia and Ukraine

“Even though an easing of the tensions in the Ukraine-Russia dispute appears to be a far-off prospect, the conflict is clearly having less and less of an effect on economic and financial market developments. Although the markets react less on the conflict, the ongoing insecurity blocks investment in the region. We therefore had to further lower our forecasts for the CIS region for the ongoing year and currently see GDP growth of minus 0.3 per cent in Russia and minus 7.0 per cent in Ukraine,” says Brezinschek.

On the positive side, the Russian budget is expected to receive large additional revenues, which may allow for a balanced budget or even a small surplus in 2014. The reason for these positive dynamics is RUB depreciation, which – given the features of the Russian budget (a major part of federal revenues is denominated in USD from duties on exported oil and gas) – translates into higher revenues. If further political tensions can be avoided, Russia should be even able to replenish the Reserve fund in 2014.

ATX: recovery expected until year-end

In the year to date, the Austrian ATX and Eastern European stock indices have somewhat trailed behind the performance of established markets in the West and the US market. The leading index of the Vienna Stock Exchange shed nearly 2 per cent, and the main markets in Eastern Europe were almost unchanged in the first half of the year. The Romanian BET was a positive outlier and boasted a gain of 8 per cent. Western markets, by contrast, registered low to mid-single-digit percentage increases. According to Bernd Maurer, Deputy Chief Analyst at Raiffeisen Centrobank (RCB), the main culprit for the slightly weaker development is the negative impact of geopolitical tensions in Ukraine on the region as a whole. For the summer months, the analysts of RCB expect a marginally positive performance for Austria and Eastern Europe. This trend should mainly be fuelled by an ongoing improvement of the economic environment and the continuing low interest rate level. After volatile summer months, RCB anticipates an ATX increase to 2,750 points until year-end. Even though current index valuation levels do not appear low by long-term historical standards, relative comparison nevertheless still points at the attractiveness of equities as an asset category in the current low interest rate environment. Moreover, the equity markets of Austria and Eastern Europe display attractive valuations compared to other established markets as well as emerging markets. Increased M&A activity during the past few months provides another stimulus for equity markets.

Industries in focus: oil, real estate, banks and industrials

Regarding individual industries, Maurer considers upstream oil companies, the real estate sector, selected banks as well as industrial stocks interesting. The analyst reckons that “the strong growth in demand for oil, rising production costs and geopolitical vagaries speak in favor of a stable to slightly rising oil price. Real estate stocks are likely to benefit from the renewed monetary stimuli by the ECB.” RCB recommends a selective approach in Eastern Europe’s banking sector. There are some promising stocks which thrive on declining risk costs and decent earnings dynamics, according to the analyst. In the industrial sector, the analysts of RCB suggest those companies that are attractively valued and manage to ride the coat-tails of the accelerating economic performance in Austria and CEE.

* Central and Eastern Europe (CEE) is composed of the regions of Central Europe (CE) with the Czech Republic, Poland, Slovakia, Slovenia and Hungary, Southeastern Europe (SEE) is composed of Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Romania and Serbia, CEE Others with Ukraine and Belarus, as well as Russia.

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Raiffeisen Bank International AG (RBI) regards both Austria, where it is a leading corporate and investment bank, and Central and Eastern Europe (CEE) as its home market. 15 markets of the region are covered by subsidiary banks. Additionally, the Group comprises numerous other financial service providers, for instance in the fields of leasing, asset management and mergers and acquisitions.

RBI is the only Austrian bank with a presence in both the world's financial centres and in Asia, the group's further geographical area of focus.

In total, more than 57,000 employees service 14.5 million customers through nearly 3,000 business outlets, the great majority of which are located in CEE.

RBI is a fully-consolidated subsidiary of Raiffeisen Zentralbank Österreich AG (RZB). RZB indirectly owns around 60.7 per cent of the common stock, the remainder is in free float. RBI's shares are listed on the Vienna Stock Exchange. RZB is the central institution of the Austrian Raiffeisen Banking Group, the country's largest banking group, and serves as the head office of the entire RZB Group, including RBI.

For further information please contact Ingrid Krenn-Ditz (+43-1-71 707-6055, [email protected]) or
Anja Knass (+43-1-71 707-5905,  [email protected]).
http://www.rbinternational.com, http://www.rzb.at
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Raiffeisen Centrobank is a leading Austrian investment bank offering the full spectrum of services and products associated with stocks, derivatives and equity capital market transactions, both via the stock exchange and off market. Supported by its Raiffeisen Investment network, the bank offers ECM and M&A advisory services in in the CEE region as well as in Turkey. Raiffeisen Centrobank is a subsidiary of Raiffeisen Bank International AG.

For further information, please contact Andrea Pelinka-Kinz (+43-1-51 520-614, [email protected]).