Recovering Markets

At the beginning of a new year it makes sense to look both back and forward. Last year was characterised by an extraordinary recovery on the equity markets in Eastern Europe, most markets have recorded triple digit gains since their respective bottoms. The recovery should, however, be viewed with the dramatic correction in 2008 in mind.

So the recovery came from a low base and most markets in the region are still not back to pre crisis levels, and handful are still more than 50% down from their respective peaks, which is an important factor to keep in mind when looking ahead. 






Source: Bloomberg as of 091230

A consequence is that valuations in Eastern Europe remain lower than in both developed markets and the main global emerging markets, despite the strong performance in 2009. We expect earnings to be upgraded following substantial cost cutting and underlying growth revisions. Investors are expected to stay focused on the largest and most liquid markets, i.e. Russia, Turkey and Poland. But the smaller markets may see some attention in 2H10.

In general, markets in the region are expected to do well in 2010, as growth and convergence come back on track. The markets do, however, remain vulnerable to any major external shock in the global financial system. In the light of the anticipated stable commodity prices, Russia is expected to do very well, both in terms of economic and earnings recovery. Russia might also surprise on rapidly decreasing inflation, which could be as low as 5-6% in 2010, and along with this, further interest rate cuts. In such an environment, domestically-orientated industries and stocks should perform well. Russia is expected to have the highest EPS growth among the BRIC countries in 2010; 31% according to consensus, with some estimates close to 80%.

Turkey managed to weather the crisis very well, partly due to experience from previous crises; banks were highly capitalised and did not provide large FX loans like in many other Eastern European countries. The market, which is dominated by financials, started to recover early in 2009 on the back of rapid and comprehensive rate cuts, exceeding 1000 basis points. Although the banks moved somewhat ahead of themselves in 1H09, there is still upside potential for the market in 2010 after a correction in late 2009 and due to the fact that industrial companies were very quick to adapt to the new reality. Rating upgrades and renewed rumours about a deal with the IMF supported the market towards the end of the year and made Turkey the best market in Eastern Europe in December and the second best in 2009 overall.

The smaller Balkan markets have suffered the most during the crisis in terms of performance, due to an exodus of foreign investors and partially leveraged local investors. On the economic front, performance is mixed, but not worse than other parts of Eastern Europe. Some markets are still down more than 60% since the peak. We believe the correction has been unfairly large, but it might take time until investors return to these markets, even though there was significant progress on the political and economic fronts in the region in general and in Serbia in particular during the last months of 2009.

The Baltic markets are somewhat different, as the underlying economies are more troubled at the same time as investors showed, at least temporarily, a renewed interest in 2H09, after TeliaSonera made a bid for the remaining shares in the local telecom operators. A more sustainable interest for the Baltics should emerge once investors are convinced that the economic recovery is on solid ground and the competitiveness issue has been sufficiently addressed. The fact that the growth forecasts started to turn more positive in December is perhaps a first sign that the negative investor sentiment towards the Baltics will eventually change.

Global investors started to put money back into emerging markets in 2009. Inflows to global emerging market funds totalled as much as USD 80bn. The lion’s share was, however, directed to Asia and Latin America. The inflows to Russia and Eastern Europe picked up somewhat towards the end of the year, but were still relatively modest. The outlook for 2010 looks quite different, as Russia is currently the most overweight recommendation by investment strategists in emerging markets. Moreover, 95% of analyst ratings on Russian stocks are “buy” or “hold” – the highest level since Bloomberg began tracking data there in 1997.