“Romania clearly shows the highest upside potential, since the market was and still is plagued by high risk aversion (which is partially justified for the moment). Consequently, the indicated performance potential is greatly reliant on a major decrease in risk aversion towards this market. Also, a still liquidity-starved market such as Romania does deserve a certain liquidity discount,” said Henning Esskuchen (photo), Co-Head CEE Equity Research.

However, the speed of improvement in the central and eastern European markets is slowing, but not alarming, since the base effect is fading out and current expectations are developing in an acceptable way.

“Hence, the imminent risk of rate hikes should also remain part of expectations for the coming quarters. In any case, sentiment combined with still strong liquidity should continue to help markets deliver a strong showing in first quarter 2010,” Erste said in the report.

Russia, as another potential top performer shows a very reliable regression outcome the RTS index having a return estimated at 49%. This in turn should be a function of a rising oil price, which again presents the general dilemma that we have with this market, which depends so strongly on one commodity.

The Czech Republic, Austria, Turkey, Poland and Croatia are all seen as potentially offering upsides of between 20% and 30% while Hungary has a negative growth potential of 3%.

“Economically, CEE markets will remain split into two parts. Those markets that found a bottom
earlier (PL, CZ, SK) should be able to report better growth for 2010, while markets lagging
behind in bottoming will also lag in terms of growth (RO, HU, HR)”, said Henning Esskuchen.

While growth will remain below-potential across the region, Erste expect CEE to post better numbers than the Eurozone throughout 2010.

Upside potential of markets in the region

Source: Erste Group

The supposedly top-performing sector technology is seen as having an upside potential of 56%. Erste analysts are tempted to trust in the indicated upside for real estate, since the sector is still well below its historical valuation, and estimate an upside potential of 48%, pointing to a new recovery.

Food and Drinks, as basically a rather defensive sector, is seen as posting sound upside as well – 45%. While earnings revisions should see a pretty favorable picture already for 2009 and 2010, the consensus book value is rising by about 10% in 2011, based on consensus estimates.

Upside potential of sectors

Source: Erste Group