Erste Bank: CEE Equity Strategy

Analysts at Erste Bank published the Equity Strategy for Central and Eastern Europe (CEE) recently. That contains not only equity specifics, but also interesting macro-economic data and ideas. Here are some excerpts from summary:

As the crisis continued through 2008 we have been searching, if not for a turning
point, for a bottom at least. A look at the length of previous downturns suggests that
the road from peak to bottom might still have some miles in it yet. Historically, crises
have lasted as long as 30 months in their extremes, but in the main have not shown
such a steep decline as witnessed in 2008.
........................

We have split our 2009 outlook for the CEE region into two parts. The short-term view relies on chart readings and the idea that tremendous amounts of liquidity are being held in cash or low-yielding assets and could search for some more appealing
opportunities. Also, the evening out of volatility should speak in favor of markets
reacting to technical buying signals. The regional NTX (like all other country indices
in the region) is still clearly indicating a bear market. However, it offers significant
running space if measured against its 200-day average (36% discount) and the
MACD is close to indicating a short-/mid-term buy signal within the first weeks of
January 2009. Another - admittedly, simplistic - way of searching for opportunities
would be to look at which sectors lost the most in 2008. However, stock-picking is
clearly necessary in order to identify those stocks that fell for good reasons and
those that were merely held hostage to the sentiment towards the sector.
........

Getting to a more long-term view, risks are present and growth in CEE will
undoubtedly slow down in 2009. However, CEE is not to Europe what is subprime to
the US. While the region is not as homogeneous as some might see it, it does have
one thing in common, which is the low level of indebtedness (not to be mixed with
the admittedly strong growth in credit). Consequently, the exposure to any
deleveraging-driven crisis should be lower in CEE. Also, we reiterate that the
comparison with often quoted Baltic markets misses some important points. Growth
rate differentials to Western markets will remain and economies such as Romania
with exports contributing only 25% to GDP should be able to fare quite well on
domestic demand. Currencies remain a weak point for the moment, but on the flip
side of the coin, we see room for positive surprises in all markets ...


Conclusion: Given the expected length of the economic downturn we still stick to
defensive sectors with the exception of food (Poland), but we would add technology.
While basic resources have clearly run out of scope based on all the criteria
mentioned, we are more optimistic for oil & gas in the region. Their mostly integrated
business profile provides some shelter against oil price development and debt
indicators do not paint a worrisome picture at all.

Even though equities are front-running economic cycles, we still think it is too early
to step into cyclical industries (except energy equipment. The only exception here
would be on a stock-picking basis driven by the arguments of a technically motivated
bear rally and for reasons as outlined in our special on potential M&A activities in
2009. The same rationale would apply to the real estate and financial services
sectors, where some stocks are clearly being punished excessively for being part of
their sector (CA Immo Interntational, Vienna Insurance Group).

For our country allocation proposal we keep Austria and the Czech Republic at
Overweight. Assuming that CEE will keep its growth differential to Western markets,
Austria as the CEE gateway should benefit from this as well. The Czech Republic
without doubt is suffering from the downswing, with consensus forecasts still at about
5% EPS growth for the PX for 2009 and 2010. Poland continues to do well
economically and the fear is that this is one of the markets that still has to the most
to lose. However, we have gone against our pure model outcome and put Poland at
the edge between Neutral and Overweight. Hungary is more the opposite case,
currently at really depressed levels and where things can only get better? We have
taken a bet this time and put Hungary at Neutral. SEE remains Underweight, but as
usual we would keep an eye on Romania. We do not expect any outperformance
from Romanian equities, but the country could still have the power to prove certain
more than bearish economic expectations wrong. Among the bigger non-EU markets
in the region, we continue to favor Turkey over Russia. Russian equities have the
strongest potential of (volatile) short-term gains, though.

Don't take at face value, but consider as a PROBABILITY!