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    Economic recovery in second half of the year expected

    04.04.2013
     
    • Global liquidity is beneficial for investment climate
    • Bull market in equities continues
    • Recommendations (1) for the global markets: equities (Europe, USA, China, India), government bonds (Spain, Ireland) and corporate bonds (non-financial high yields)
    • Growth in CEE (2) in the second half of the year
    • ATX target: 2,650 points by the end of the year
    • Favourites for Austria and CEE: CA-Immobilien, RHI, Flughafen Wien, MOL, LUKoil, Azoty Tarnów, PKO BP

    1. Timeline: end of the 2nd quarter 2013.
    2. 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 and the Commonwealth of Independent States (CIS) with Russia, Ukraine and Belarus.

    The analysts of Raiffeisen Bank International AG (RBI) hope for an economic recovery in the second half of this year. „Economic activity in Europe, and in the USA, remains sluggish. Although leading indicators, such as the ISM and the ifo index, are continuously pointing to better sentiment amongst companies, the improvement has yet to be confirmed by hard facts, such as new orders”, said Peter Brezinschek, head of Raiffeisen Research. Nevertheless, the Research expert is confident. Even before mid-year, net exports should bring the first signs of economic growth and subsequently stimulate investments.

    The robust labour market and good wage developments for employees in the core Eurozone countries around Germany are further arguments pointing to an upward trend in private consumption. “The decline in the inflation rate in 2013 will open up more leeway for gains in real income. Still, income effects are only expected to start playing a role from 2014 onwards”, said Brezinschek. This year’s GDP forecasts for the Eurozone look poor at first glance, with negative performance in the prognoses of minus 0.1 per cent because the first half-year might pass rather cautiously. On the whole, the overall trend in the coming 12-18 months should point higher. The divergence in economic activity within the Eurozone will likely last somewhat longer. The budget cuts implemented in the USA in March are compatible with the Research analysts’ GDP projection of 1.5 per cent for 2013.

    Global liquidity is beneficial for investment climate

    The remarkable increases in equity prices during the first few months of 2013 resulted in old peaks being approximated or exceeded for some market indices. Global liquidity is beneficial for the investment climate, along with the expectations of an economic recovery in the second half of the year. As long as the leading indicators do not go down again as they did in 2012, the positive developments in prices will continue. Yield premiums on corporate bonds should also remain at historically low levels. Risk factors remain the formation of a government in Italy, the future Cyprus business model and the resistance in moving forward with reforms in France.

    Euro/dollar development

    Since the start of the year, rate moves in EUR/USD were mainly marked by the debt crisis in the Eurozone countries. “As soon as a viable government is in place, risk aversion on the markets will subside again. As a result, the yield differential should narrow again. In this case, the euro will rapidly gain, moving towards a rate of 1.35 versus the dollar. It remains a residual risk that no agreement on a viable government in Italy can be reached“, according to the Raiffeisen Research strategy report for the second quarter of 2013.

    European equities with better return potential in the long term

    Looking at the S&P 500, upward phases in which a new high has been registered, have historically lasted less slightly than five years on average with prices increasing by a hefty 155 per cent on average. The current uptrend started almost exactly four years ago and so far the market has managed a gain of just about 130 per cent. These observations confirm that the US equity market cycle has reached the beginning of its mature phase. The European equity market has seen mixed developments mainly caused by declines in corporate results in the peripheral countries and the high weighting of the financial sector. “Against the backdrop of the steadily good financing conditions and the slack conditions on the labour market, this upward trend in earnings is not expected to end in the immediate future”, said Helge Rechberger, head of Equity Market Research. “The currently quite high US margins would suggest that significantly lower-than-average earnings growth rates can be anticipated in the longer term. In Europe, the outlook in this regard is better, considering the lower starting levels and the potential for economic recovery“.

    Growth in CEE only during second half of the year

    The widespread budget consolidation efforts and the modest increases in real income have hampered domestic demand in CEE for quite some time. Now also GDP growth rates in the region have also slipped into the red, aside from a few exceptions. While most of the countries in Central Europe (CE) and Southeastern Europe (SEE) are now suffering from the anticipated contraction in economic performance, the CIS countries are still posting positive growth rates. The recession in large parts of the Eurozone is dragging net exports deep into negative territory. “A more significant pick-up in growth throughout CEE will only start during the second half of the year. In Austria, a mild improvement in growth will also probably only emerge after the spring quarter”, said chief analyst Brezinschek.

    The GDP expectation for the region CEE in 2013 is 2.0 per cent (previous year: 2.0 %). In the subregions CE 0.5 per cent (previous year: 0.6%), SEE 0.9 per cent (previous year: -0.3%), and CIS 2.8 per cent (previous year: 3.1%). Compared to the Eurozone: GDP expectation for 2013 of
    -0.1 per cent (previous year: -0.5 per cent). In Austria, GDP growth will remain at 0.5 per cent. Exports (+1.9 per cent) and investments (+0.9 per cent) will provide first impetus in this year.

    Strong demand for CEE government bonds

    Due to the extremely low yields in the Eurozone interest in CEE government bonds has increased substantially. Strong foreign demand for CEE government bonds has helped to lower yield levels. The Research experts project that yields on government bonds throughout the region will remain broadly unchanged until mid-year. This assumption is supported by the continued interest rate cuts due to decreasing inflation rates.
    The analysts see potential for the CEE equity markets, where they expect to see indices rise by between 4 and 9 per cent by the end of the second quarter. In terms of performance Istanbul should take the lead, followed by Bucharest and Vienna.

    ATX-target: 2,650 by the end of the year

    Looking ahead to the end of the year, the domestic equity market should continue to increase further to 2,650 points. “Thus we recommend the Austrian market as a clear buy. We would also like to stress the relative attractiveness of equities compared to investments in bonds – after all, the average expected dividend yield of 3.2 per cent for 2013 is considerably above the 10-year government bond yield of 1.65 per cent,” explained Stefan Maxian, Head of Company Research of Raiffeisen Centrobank AG (RCB). By the end of June, RCB’s Company Research expects the ATX, the leading index of the Vienna Stock Exchange, to reach 2,560 points. This translates into an increase of some 8 per cent.

    Austrian favourites: CA-Immobilien, RHI and Flughafen Wien

    In Austria, RCB analysts currently recommend in particular the shares of CA-Immobilien, RHI and Flughafen Wien. Whereas CA-Immobilien and RHI were among analysts’ top recommendations also in the past quarter, Flughafen Wien was upgraded from “hold” to “buy” again only last week. With regard to CA-Immobilien, RCB would like to point out the group’s focus on strengthening its balance sheet and enhancing profitability. A large-scale property sales programme in 2013 should raise the equity ratio by several percentage points so that a positive valuation effect is anticipated. As for RHI, Stefan Maxian still considers the group an attractively valued industrial stock: “Thanks to a lower cost base the group’s intensified backward integration should give rise to a positive earnings effect. As the year progresses, we also anticipate positive news-flow about the growth projects in BRIC countries”. Flughafen Wien again posted a positive surprise in the fourth quarter of 2012, fuelled by cost-cutting measures that were more pronounced than anticipated. The slightly negative passenger trend in the first two months is expected to improve in the coming months on the back of the fading negative base effect on account of airlines’ capacity reductions.

    CEE top picks: MOL, LUKoil, Azoty Tarnów and PKO BP

    In CEE the RCB chief analyst’s current favourites are the oil stocks MOL from Hungary and LUKoil from Russia as well as the Polish companies Azoty Tarnów and the bank PKO BP. According to Maxian the latest share price drop of MOL is not justified fundamentally. “In our opinion, current share price levels are attractive, due also to the continuing robust crude price expectations”, said Maxian. LUKoil, the world’s second-largest vertically integrated private oil and gas company in terms of reserves, is currently valued at a substantial discount compared to Rosneft, its closest peer. With regard to the Polish banking sector, PKO BP has the strongest appeal in valuation terms and also performed better than other banking stocks in the region of late. Fertilizer producer Azoty Tarnów has emerged as a beneficiary from the consolidation of the Polish chemicals industry. Sales revenues are expected to show a positive trend in the years to come, above all due to rising EU subsidies for Polish farmers. The group’s ammonia installations are among the most efficient facilities in the world.

    * * * 

    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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