Robust CEE economies support local equity markets despite inflation fears


  • Economic growth in CEE and Austria remains solid
  • Inflation fears do not weigh on economic growth
  • ""Buy"" recommendation for CEE equity markets
  • ATX: earnings growth rate for this year around 34 per cent
  • Recommendations: Bene, conwert, Gazprom, Getin Holding and Globe Trade Center

Is inflation set to strangle the current growth trend in Central and Eastern Europe (CEE)? “No,” says Peter Brezinschek, Head of Raiffeisen Research, a unit of Raiffeisen Bank International AG (RBI). “We temporarily expect higher inflation risk, with consumer prices rising 6.9 percent in 2011 in CEE and 2.6 per cent in Austria, but this rise will do only limited harm to GDP growth in the region,” he adds.

Raiffeisen Research’s analysts expect the economic recovery in CEE as a whole to keep moving along in the first half of 2011. However, developments on the subregional level are likely to continue to be characterized by a multi-speed recovery. Our forecasted 2011 and 2012 GDP growth rates for Central Europe (with the exception of Hungary), Russia and Ukraine are only somewhat lower than the long-term, pre-crisis averages. GDP growth in Central Europe (CE) is seen at 3.1 per cent in 2011 and 3.8 per cent in 2012, while the CIS economies are expected to grow by 4.9 per cent and 4.5 per cent, respectively. According to Raiffeisen Research, only the economies in Southeastern Europe (SEE) will continue to post GDP growth rates well below their pre-crisis levels, with the analysts forecasting 1.8 per cent for 2011 and 3.4 per cent for 2012. “Moreover, SEE remains vulnerable to negative spillover from elevated food and energy prices. Most CE countries, as well as the CIS region, are characterised by a certain degree of resilience towards the negative effects of elevated food and energy prices,” Brezinschek explains.

Brezinschek expects the entire CEE region to grow by 3.9 per cent in 2011 and 4.1 per cent in 2012, roughly 2 percentage points higher than the eurozone's projected economic growth of 1.8 per cent this year and 1.9 per cent the following year.

Raiffeisen Research expects the Austrian economy to continue its comparatively strong performance in 2011 by posting GDP growth of 2.5 per cent. Although this growth rate would make Austria one of the fastest growing regions in the eurozone, the country will most likely reach its pre-crisis GDP volume in real terms only sometime during 2011, according to Brezinschek.

SEE most vulnerable to higher food and energy prices

Raiffeisen Research took a cross-country look at the vulnerability of fourteen CEE countries to a sustained rise in food and energy prices, comparing the subregions with each other, but not contrasting CEE’s vulnerabilities with those of other regions across the globe. The analysts established that the individual CEE economies are characterised by very differing vulnerabilities, depending on their specific economic structures, as well as their stage of economic development.

“Russia and Ukraine profit from their position as either energy or food exporters, the fact that their external positions are healthier than those of most SEE countries, as well as their huge potential for energy savings. The relative resilience of the CE countries stems from the low weighting of energy and food in their CPI baskets and their comparatively solid external positions,” Brezinschek explains. Raiffeisen Research's analysis established that CE countries like the Czech Republic and Poland also have a moderate propensity to import food. Hungary represents an exception in this subregion, as it is characterised by a strong dependency on food and energy imports, while its external position remains weaker than in other CE economies. “The SEE region's vulnerability to rising food and energy prices is driven mostly by large the share of food and energy in the respective CPI baskets, sizeable energy imports, as well as structurally weak external positions. In the countries that we identified as being the most vulnerable, policy actions such as price or tax hikes to shore up public finances should be introduced in a cautious and well-timed manner. Otherwise, increasing country-specific risks related to elevated energy and food prices may dent investor sentiment,” Brezinschek adds.

Currency outlook reflects economic divergences in CEE

The outlook for currencies and interest rates in CEE reflects the economic divergences within the region. While some CEE central banks such as those in the Czech Republic, Poland, and Russia are in line with the ECB by already taking a tightening stance, others such as those in Hungary or Romania are more inclined to use all possible room for manoeuvring in keeping the rates at a constant level. “This divergent outlook is partially reflected in our FX calls. The Polish zloty and Czech crown should remain stronger over a three-to-six month horizon. The imminent euro strength vis-á-vis the US dollar should also support currencies that are considered as leveraged euro-plays, such as the zloty,” Brezinschek analyses. He is more sceptical for the Hungarian forint and the Romanian leu, for both of which Brezinschek expects sideways trading at best. “Given our rate calls, we would prefer local currency bonds in markets where the hiking cycle is likely to be finished soon. Thus, we recommend long positions in Polish local currency bonds. We are more sceptical about foreign currency sovereign and corporate bonds in CEE. These markets are priced rather tight, while our outlook for benchmark rates -- especially in the eurozone -- is challenging from a three-to-six month perspective,” he adds.

CEE equity markets still on track for recovery

Brezinschek expects the positive trend on the CEE equity markets to continue in the second quarter of 2011. The global economy's generally more positive development and the abundant supply of liquidity should provide good conditions for shares on CEE stock exchanges to rise by a further 6 to 11 per cent. Moreover, equity markets in Central and Eastern Europe are supported by local companies' attractive valuations and growth prospects. “In the second quarter, we expect a generally positive development in share prices and prefer the SEE region and -- with an eye on oil prices -- Russia over the stocks in Central Europe. In general, we prefer a cyclical stance in terms of sectors,” Brezinschek recommends.

Growth dynamics remain strong

""Given that Austria's capacity utilisation level of 86 per cent is the highest in the eurozone, the climate for investments in plant and equipment is more than attractive. This will support the Austrian GDP growth in 2011, which we expect to reach 2.5 per cent, compared to 1.8 per cent for the eurozone,” says Birgit Kuras, Chief Analyst of Raiffeisen Centrobank AG. While exports had been the principal driver of growth in 2010, Kuras expects investments and private consumption to take on this role in 2011. Even inflation – Centrobank's analysts see Austria's annual inflation rate at 2.6 per cent in 2011 – should not impact the positive path of the country's economy. With this optimistic forecast, Austria is set to become one of the fastest growing countries in Europe.

Overall conditions for the ATX still intact

The Austrian stock market has seen a series of ups and downs in recent months. After a satisfactory start to 2011 (with the ATX passing the 3,000 mark in February), the surprising developments in the Arab world and the tragic events in Japan triggered a sharp rise in investors' risk aversion. In contrast to most of its CEE counterparts, the ATX posted losses as a result, with a clearly negative YTD performance. Despite these developments, “the overall conditions for the Austrian stock market have not changed significantly in the past few weeks,” Kuras points out. Growth conditions remain strong and Austria’s public finances are still relatively stable. Conditions for another increase in earnings appear to be intact, as there are no signs of an end to the recovery in CEE, with even the SEE economies leaving their stagnation phase. As a result of the changed composition of the ATX – the share of the financial sector has increased – the earnings growth rate for this year should be around 34 per cent, which is substantially higher than the rate projected for the “old” index composition (+22 per cent). Thus, Austrian companies continue to post higher growth than those in the DAX or the Euro Stoxx 50. With a P/E ratio of 11.9, their valuation levels can also be considered attractive. Kuras is convinced that the positive overall conditions for the Austrian equity market are still intact and that the ATX should see a positive performance in the coming months. She forecasts the ATX reaching 3,100 points by the end of June and 3,300 points by the end of the year.

Recommendations: Bene, conwert, Gazprom, Getin Holding and Globe Trade Center


In 2011, financial stocks are expected to benefit from both a cutback in risk costs and a revival in corporate financing. Stefan Maxian, head of Raiffeisen Centrobank’s company research, favours retail banks, as he expects them to benefit from the positive impact of decreasing risk costs, particularly in the context of private customers in the CEE region, and because banks with a strong deposit base tend to benefit from rising margins against the backdrop of a hike in interest rates. For that reason, Raiffeisen Centrobank’s favourites in Poland are PKO BP and Getin Holding. In Austria, Erste Bank appears to be back at an attractive level, now that the market has priced in the outcome of the country's banking tax.

Real Estate

The earnings development of real estate stocks showed a clear upward trend during the past few quarters. In March, Immofinanz, conwert and CA Immo moved up into the ATX, the Vienna Stock Exchange's blue-chip index. Maxian sees ”considerable potential“ for Immofinanz, Austria's largest real estate group, following the company's successful restructuring and its recently completed refinancing of two convertible bonds. conwert should continue to benefit from the strong demand for high-grade real estate, both on part of private and institutional investors. According the Raiffeisen Centrobank, Globe Trade Center offers the greatest potential among Polish real estate stocks, thanks not least to the company’s strong portfolio of office real estate in Poland's leading cities.

Oil & gas

The oil and gas sector continues to be characterized by rising oil prices, low refinery margins and the increasing significance of natural gas. The developments in Japan will trigger a higher demand for gas, thus further bolstering this trend. In the short-term, Maxian expects a price increase for Asian LNG. In the long-term, global gas prices will also be impacted, as Europe is increasingly relying on gas-fired power plants. Russia's Gazprom, one of the major players in the sector, is excellently positioned. “Gazprom's expected signing of a gas supply agreement with China and the new pricing formula for its European export business also speak in favour of its shares,” according to Maxian. Raiffeisen Centrobank also sees potential in other gas producers such as OMV, MOL or Petrom.


The principal topic in the utilities sector is currently the nuclear power debate in Germany and its impact on electricity rates, although it is not yet at all clear what path developments will take. Verbund and CEZ are the main profiteers from rising electricity rates, but EVN also stands to profit indirectly, thanks to its shareholding in Verbund.


The construction industry demonstrates no clear picture. The dynamics in the structural engineering sector recently improved, while the downturn in the civil engineering sector reflects cost-cutting in public budgets. Maxian’s recommendations among the construction stocks: Polimex-Mostostal, Wienerberger and Zumtobel. As a late cyclic stock, Bene should benefit from the current recovery of the markets and return to profitability in the course of the current business year.


Dividend payments are the focus of attention in the telecommunications sector in the second quarter, reflecting the fact that the average dividend yield of CEE telecom stocks stands at more than 8 per cent. Maxian expects that 2011 will see telecom firms posting milder decreases in their results, but not yet returning to positive growth rates.

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Raiffeisen Research, the analytical unit of the Austrian Raiffeisen Banking Group, is specialized in providing analyses of and forecasts for economic cycles, interest rates, currency developments and equities in Austria and Central and Eastern Europe (CEE). Represented in 15 countries in this region, the Raiffeisen Research team regularly provides up-to-date reports on the newest market developments and assessments.

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. In CEE, RBI operates an extensive network of subsidiary banks, leasing companies and a range of other specialised financial service providers in 17 markets.

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 59,000 employees service about 15 million customers through around 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 78.5 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 group head office of the entire RZB Group, including RBI.

For further information please contact Michael Palzer (+43-1-71 707-2828, [email protected]) or Alexandra Jocham (+43-1-71 707-5627, [email protected]),