New research from Bank Austria Creditanstalt shows that the equity markets of east and central Europe have been among the best-performing in the world in the past few years, and that the recent correction reflects mainly global rather than local factors. However, the bank warns that investors in the region must expect more volatility.
Equities in east and central Europe have appreciated by nearly 30% a year in each of the past three years. Eurobonds from central and eastern European issuers are up 11% in the same period, and bonds in local currency by 7%.
During the past week, however, there was a correction across all asset classes and currencies in the region. “This correction was a wake-up call, reminding investors in Central and Eastern Europe that securities and currencies are not moving in a one-way street”, said Peter Szopo, Head of Markets Research at Bank Austria Creditanstalt.
Despite a favourable economic background, investors in the region are facing new challenges. BA-CA reckons that a number of mainly global factors, that positively influenced the investment climate in 2004, are likely to turn out less benign this year.
Global economic growth, which had reached a 30-year-high in 2004, will slow down and growth in euroland is again likely to disappoint, it says. US interest rates, which were “accommodative£” last year, are expected to continue to rise, and will likely by followed by a rate hike by the European central bank later this year. Lastly, the risk appetite of investors, reflected in their demand for risky assets such as Emerging Markets equities and fixed income, may dwindle going forward, says BA-CA.
That said, BA-CA reckons developments within the region itself are positive. The region’s growth lead over Euroland will remain in the two to four percentage points range. Inflation in most countries is anticipated to fall during the course of the year. Moreover, fiscal and foreign trade imbalances will ease gradually. In addition, as a result of EU accession, central and eastern Europe is now much more convincing as the area of growth and reform in Europe offering a low-cost and low-tax environment to corporate investors from Western Europe.
At the same time, intra-regional sector consolidation has speeded up during the past few months. Companies from the Czech Republic, Poland and Hungary (such as CEZ, MOL, Magyar Telekom, OTP, PKN) are expanding via acquisitions within CEE, especially in the South-East.
BA-CA says the slowdown in equities is likely to be temporary, but that investors must expect more volatility, triggered by politics (elections in Poland and Bulgaria, turbulences in the Czech Republic) or by economic events (interest rate policies). In the short term, pressure on local currencies may persist, says the bank. Near-term there is room for Eurobonds spread tightening, but further rate hikes in the US may lead to a revaluation of emerging markets credit risk in the course of this year.
Mid-March, for the first time this year, EMEA equity funds withdrew money from the region; however, the outflow was minor, says BA-CA. Still, the year-to-date net inflow remains above US$ 2 billion. “Consolidation does not fully come as a surprise, given the unforeseen surge in share prices since the beginning of the year and also considering that CEE equity valuations rapidly approached Western Europe levels during the past twelve months (in the case of Czech Republic even overtaking them),” says the Austrian bank.
“Given the relatively sound economic backdrop and the vigour in the corporate sector, we do not anticipate a longer-term downturn in CEE equity markets”, adds Szopo. He says IPOs in Poland and Russia as well as emerging interest in South East Europe (Bulgaria, Romania, Ukraine, and Turkey) have broadened the range of investment opportunities of regional investment funds, which, in turn, is likely to attract additional capital inflows.