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03.07.2017

Outlook for Stock Markets & the Vienna Stock Exchange, H2 2017

ATX clearly outperforms in 2017 to date, positive growth differential of CEE region vs. EZ remains intact, political situation in the euro zone stabilizes after recent elections (NL, FR)

The core countries of Central and Eastern Europe (CEE) continue to generate sustained above-average economic growth. Political uncertainties in the euro zone were significantly reduced by the outcome of recent elections in the Netherlands and France. The current environment illustrates that the CEE region is an anchor of economic stability compared to other emerging markets. Negligible effects from the “Brexit”, ample foreign currency reserves, sound current account balances and low debt levels represent a strong baseline scenario. In view of low interest rates, the Vienna Stock Exchange still offers interesting investment opportunities, but somewhat extended valuations suggest that only moderate upside potential remains.

  •  ATX has clearly outperformed in 2017 to date
  • More stable, comparatively stronger economic sentiment in the CEE region, lower dependence on developments in the UK and energy markets, euro zone politically stabilized after recent elections
  • Sustained positive growth differential of the CEE region vs. the euro zone remains intact, average GDP growth of 3.7% expected in the CEE region in 2017 (vs. EZ 1.9%)
  • Valuations remain relatively attractive (forward P/E ratio: 13.9x in 2017, 13.0x in 2018)
  • (Distorted but) intact earnings growth rates (2017e: +30%; 2018e: +5.2%), dividend yield remains interesting on a relative basis (2017e: 3.0%, 2018e: 3.5%)
  • Stocks remain attractively valued vs. 10-yr. government bonds (680 bps spread based on 2017/2018 forward P/E ratios)
  • Top Picks:
    • Cyclical stocks: Andritz and RBI
    • Construction stocks: STRABAG, Palfinger
    • Focus on valuations and dividend yields: CA Immo, Oesterreichische Post, UNIQA
Fritz Mostböck, Head of Erste Group Research ©Daniel Hinterramskogler

Vienna Stock Exchange Dominated by CEE Ties

Weighted by market capitalization, around 75% of the companies in the ATX generate a significant share of their sales and earnings in CEE countries. Overall, this economic as well as sectoral diversification results in a robust economic performance. The remaining ATX companies are for the most part successful market and cost leaders in global niche markets. “Political risks in the euro area have been reduced in 2017 as a result of the recent elections in the Netherlands and France. Improving sentiment in large emerging markets such as China or Russia creates a promising overarching economic environment. This is a favorable combination for the CEE region. A low share of exports to the UK, low energy prices, but also healthy current account balances, as well as ample foreign exchange reserves are underpinning the region's disproportionally strong economic performance and provide it with the wherewithal to mitigate potential market turmoil”, notes Fritz Mostboeck, Head of Erste Group Research.

Vienna Stock Exchange Dominated by CEE Ties

Weighted by market capitalization, around 75% of the companies in the ATX generate a significant share of their sales and earnings in CEE countries. Overall, this economic as well as sectoral diversification results in a robust economic performance. The remaining ATX companies are for the most part successful market and cost leaders in global niche markets. “Political risks in the euro area have been reduced in 2017 as a result of the recent elections in the Netherlands and France. Improving sentiment in large emerging markets such as China or Russia creates a promising overarching economic environment. This is a favorable combination for the CEE region. A low share of exports to the UK, low energy prices, but also healthy current account balances, as well as ample foreign exchange reserves are underpinning the region's disproportionally strong economic performance and provide it with the wherewithal to mitigate potential market turmoil”, notes Fritz Mostboeck, Head of Erste Group Research.

Fritz Mostböck, Head of Erste Group Research ©Daniel Hinterramskogler

Focus on cyclical stocks, including construction companies

“Although the outperformance of cyclical stocks has eased slightly in recent months, a strong economic outlook continues to underpin positive stock market sentiment. We still favor cyclical stocks, which should be the greatest beneficiaries of this trend”, says Christoph Schultes, Senior Analyst, CEE Equity Research. “Strong global economic growth should serve as a driving force for Andritz. Besides this stock we like construction stocks, particularly STRABAG and Palfinger. Numerous infrastructure projects, primarily in Germany, should boost their sales and earnings growth.” Raiffeisenbank International is also included in Erste Group's recommendations. “Rising long term returns, stronger capital ratios and a low valuation argue in favor of RBI. Among real estate investment trusts, we like CA Immo best. Its strong cash flows and its attractive portfolio, which offers inter alia highly promising development opportunities in Germany's top cities, strike us as convincing.” Erste Group's experts are of the opinion that investors with a focus on dividend yields would be best served by Oesterreichische Post and UNIQA. “Investors will have to be patient though with respect to the next dividend payments, as no distributions are expected until next year”, Schultes lastly points out.

Moderate upside potential in view of earnings growth rates

While a relatively stronger baseline scenario is now in place, somewhat extended valuations suggest there remains only moderate upside potential. Partly the favorable fundamentals have been factored in already, as evidenced by the strong outperformance of the Vienna Stock Exchange in 2017 to date. “In view of the low interest rate environment, dividend and earnings yields remain attractive. Rising trading volume confirms continued investor interest in selected stocks. On the other hand, P/E ratios and earnings growth rates suggest that only limited catch-up potential remains in 2017”, explains Fritz Mostboeck, Head of Group Research, in conclusion.