Low capital intensity combined with low gearing ratio and higher expected return on capital employed (ROCE) make Technology, Healthcare and Oil & Gas interesting. The impacts of the global financial and confidence crisis have wormed their way into the real economy. Still, the extreme slide of the equity markets over a period of more than 1 years was clearly exaggerated, say Erste Group analysts.
Although the economic outlook remains gloomy Erste Group analysts rate as overly bearish the reaction to the supposedly dramatic situation in CEE. While fund flow data for February is still negative (particularly for emerging Europe markets), in March money market funds experienced substantial outflows and money got directed into equity again.
We continue to see markets as volatile, although we would see the notion of them having found a bottom as realistic, at least. For the region, we expect returning liquidity to focus first on the biggest markets, says Henning Esskuchen, Co-Head of CEE Equity Research at Erste Group
Compared to the last quarter’s country allocation (overweight Austria, Czech Republic) Erste Group analysts have become even more cautious on Poland Erste Group analysts see current environment weighing on indebted companies. High financing needs will burden the free cash flow to equity
and thus continue to dampen equity valuations even in the case of companies with more stable business models.
To put it simply, in times of high costs of capital, capital intensive stocks are losers. We would favour stocks with low capital intensity, low gearing ratio and rather high expected return on capital employed (ROCE) development for 2009-2011, continues Esskuchen.
“We believe that stock markets may at least further stabilise in Q2 and we therefore set our global equity weighting to neutral – for the first time since Q4 2007,” says Fritz Mostbck, head of Group Research. “The lows of early March 2009 still might be tested again. Overall, caution continues to be required and we are keeping an overweighting in cash.”
L.D.