Turbulent Emerging Market conditions have little impact on CEE


Vienna, 2 October 2013

  • Growth in Austria yet behind expectations for 2013, but speed-up to 1.5 per cent in 2014
  • GDP forecasts see improving sentiment in CEE due to recovery in the Eurozone
  • No spillover effects from sell-off in Emerging Markets
  • ATX target: 2,800 points by midyear 2014
  • Favorites for Austria and CEE: OMV, Oesterreichische Post, RHI, KGHM, Krka, Egis, PhosAgro

“In Austria, growth in H2 will have to accelerate considerably for our 2013 GDP forecast to be accurate. For 2013 as a whole, we still project real GDP growth of 0.5 per cent. The anticipated upturn in economic activity should reach its high point in Q4 2014/Q1 2015, as reflected in the projected GDP growth rates of 1.5 per cent for 2014 and 2.3 per cent for 2015. All in all, in 2014 there will be a sharp reduction in the growth differences between the various regions in Central and Eastern Europe (CEE) 1. This convergent trend in GDP growth should also tend to characterise developments in 2015,” starts Peter Brezinschek, head of Raiffeisen Research at Raiffeisen Bank International AG (RBI), his analysis in the recent publication for the fourth quarter ”Central & Eastern European Strategies“.

The reason for this reduction in growth differences is the optimistic forecast for Germany, which should pave the way for increases in net exports in many of the open CEE economies. Domestic demand will probably only pick up with a certain lag, and as a result there will not be any significant change in current account balances.

GDP forecasts see improving sentiment in CEE pulled by Eurozone

After a disappointing beginning of the year, Raiffeisen Research’s assessment of the economy started to improve in the subsequent months. “Russia and Ukraine were the only countries where the spring data releases were quite subdued. As there were no signs of an upturn over the summer, we lowered our Russian GDP forecast for 2014 to plus 2 per cent. Otherwise, we only modestly reduced the 2014 forecasts for Turkey, and with regard to all of the other GDP projections we see a solid basis for the anticipated improvement in sentiment in the Eurozone and the CEE countries,” summarizes Brezinschek the current growth projections.

No spillover effects from sell-off in Emerging Markets

While currencies and bonds in the Emerging Markets (EM) have returned to some stability recently, previous months were rocky. Hints about a reduction in the Fed’s bond buying programme in late May triggered major disruptions on EM markets. Since May, currencies such as the Indonesian rupiah, the Brazilian real, the South African rand and the Turkish lira have lost 10 to15 per cent of their value towards the Euro. CEE has not been at the centre of these developments. Even CEE countries with challenging fundamentals such as Hungary were not hit hard. Instead, Asian and Latin American countries suffered much more.

The analysts of Raiffeisen Research observe that regardless of the outflows of capital from the Emerging Markets, the rate-cutting trend in the CEE region has continued. Nonetheless, the development of domestic prices, currency weakness and the policies of the US Central Bank will set a lower limit to rate-cutting ambitions in most CEE countries. In Hungary and Romania, the central banks are still trying to exploit their remaining scope of action. This may, however, lead to temporary weakness for their currencies. “Nevertheless, on the whole, we project modest appreciation trends for most CEE currencies versus the Euro over the next three to nine months. After weakening, the rouble should also stabilise temporarily versus the US dollar. Still, over the medium term, we expect to see more depreciation for the Russian rouble,” describes Brezinschek the impact on monetary policy and exchange rates.

Impact on the bond and equity markets

Yield increases in most CEE countries amounted to 50 to 100 basis points on 10-year maturities and were thus significantly lower compared to the other Emerging Markets, as the fundamental conditions (capital/current account balance) were better. “The outflows of capital only had a highly negative impact in Ukraine and Turkey. No easing can be expected to come from the overall global conditions, and thus long-term yields should remain at elevated levels until the first quarter. Accordingly, we take a positive view of LCY bonds for the next three to six months. The improvement in economic activity, however, should become clearly visible during the first half of 2014 and this will be reflected in further rises in equity indices,” ends Brezinschek his outlook for the coming quarters.

As for CEE equity markets, Raiffeisen Research’s analysts are optimistic about a positive end to the year, thanks to the extremely attractive valuations and the fact that these asset prices have lagged behind so far. The improvement in economic activity, however, should become clearly visible during the first half of 2014 and this will be reflected in further rises in equity indices. Romania is the analyst’s favorite due to reform progress and ongoing privatizations. The price potential until mid-year for CEE indices is between 10 and 19 per cent.

Strong ATX performance continues

In the course of the third quarter, the Austrian equity market partly recovered the underperformance of the first half. Cyclical companies such as Zumtobel and Wienerberger, which trailed behind the market last year, bounced back significantly. Also “index-heavyweights” such as voestalpine, Erste Group and OMV contributed to the strong performance of the ATX. Raiffeisen Centrobank (RCB) Chief Analyst Stefan Maxian explains, “Based on a positive equity market environment in Western Europe and fuelled by increasingly dynamic economic growth in Austria and the CEE region we forecast this market trend to continue in the fourth quarter. And we believe that it will remain in force in the first half of 2014. In that period, the ATX should recover further and reach the mark of 2,800 points”. The ATX displays a price-earnings-ratio of 11.7 (within a one-year horizon), which is still slightly below the long-term average. In light of the current low interest rate environment, the valuation ratios may very well rise further as the year progresses.

Austrian equity favorites: OMV and Oesterreichische Post, RHI

RCB counts OMV, Oesterreichische Post and RHI among its favorites on the domestic equity market. As regards OMV, the “buy” recommendation for the share is justified by the announced investments in the upstream segment, which are considered sensible from a strategic point of view and value-accretive. As far as Oesterreichische Post is concerned, better than expected cost trends, the positive effects of Austrian parliamentary elections on the letter mail volume and also the IPO of the English Royal Mail should have a positive bearing on the share price trend.
The assessment of RHI is still based on an expansion of production locations in growth markets (BRIC, USA) and the positive consequences from increased backward integration.

CEE Top-Picks: KGHM, Krka, Egis, PhosAgro

In CEE, the RCB Company Research Team currently considers the Polish copper and silver producer KGHM as strong, thanks to the inclusion of a Canadian project which adds significant value. Moreover, the Slovenian pharmaceutical company Krka is among the favorites due to its high exposure to the fast-growing Russian pharmaceutical market and a possible re-rating in connection with the recently announced takeover offer for the Hungarian pharmaceutical player Egis. In Russia, RCB analysts recommend the share of PhosAgro, a producer of phosphate fertilizers.

1Central 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 and the Commonwealth of Independent States (CIS) with Russia, Ukraine and Belarus.

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This press release contains recommendations in the context of § 48f of the Austrian Stock Exchange Act (BörseG). Disclaimer and Disclosures, see https://www.rcb.at/en/news-info/securities-prospectus/ 

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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. 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, around 59,000 employees serve over 14.3 million customers through more than 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 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 AG, the equity company of Raiffeisen Bank International, is a leading Austrian investment bank with a strong focus on the CEE region. It offers the entire range of services and products having to do with stock, derivatives and equity transactions in and around the stock market. On the basis of this position, the investment bank also offers exclusive individual Private Banking services.

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