Stock markets have used up most of their potential

Stock markets have used up most of their potentialThe aggressive fiscal and monetary policy measures seem to have finally lifted the risk tolerance among investors around the globe. The VDAX, as a measure of general market nervousness, has also gradually returned to September levels, after posting an historic high on November 19, 2008, with nearly 200%.

The good equity market performance in March involved a significantly lower turnover, down 50% YoY, but rested on generally calmer volatility, Erste analysts say. But the argument of decreasing risk premiums lifting equities is losing steam and should have used up most of its potential already.

Moreover, specialists say that since the beginning of the year, cash is leaving low-yielding money market funds, looking for a new home in bond and equity markets. “Interestingly, fund flows are to some extent circumventing developed markets and focusing on emerging markets”, reads the Erste report.

Within global equity funds, emerging markets have already reached their historical weight again (9.6%).

Equity markets will stagnate in the best case scenario

Equity markets will stagnate in the best case scenarioCorresponding to a less panic-driven view on markets, confidence started to recover across the board. In its latest release, the ZEW indicator for the region even turned positive on economic outlook, allowing equity markets to front-run the expected economic recovery, which however, has to come true sooner than later.

“However, without reliable signs of fundamental improvement, equity markets should hover around a sideways trend - in the best case”, Erste analysts say.

Since the cleaning up of an oversold situation has been the main driver, previously strongly sold markets and sectors performed the best in the recent market upswing.

Emerging European stocks, which had been oversold, outperformed all other geographic regions by a significant margin.

Meanwhile, ‘safer havens’ like the US, UK and Western European stocks underperformed in this rally.

Erste Group analysts favour defensive sectors, such as utilities, telecoms and pharmas

Erste Group analysts favour defensive sectors, such as utilities, telecoms and pharmasCyclical sectors and financials, which suffered the most from the record-high risk aversion and overdone fears of total economic collapse, have outperformed industries deemed as defensive.

Overall, Erste Group analysts still favour more defensive sectors, such as utilities, telecoms and pharmas, although these sectors have posted the best performances over the entire cycle since October 2007.

“We expect more defensive industries to now be a bit more in the spotlight again, since they should have weathered the current situation better, meaning with much less spectacular moves in their financials”, Erste analysts say.

In Europe, utilities are seen as growing between 3% (2009e) and 9% (2011e) while telecoms are rather flat, while healthcare is expected to produce improving growth rates of between 6% in 2009 and about 13% in 2011.

“Interestingly, EPS growth of about 22% is expected in the CEE region for 2010”, says Erste.

Specialists don’t recommend cyclical to investors, at least not for the reminder of this year, as an improvement is expected no sooner than 2011.

Erste sees a strong upswing in financials, even on 2009 expected earnings. Logically, insurance has some part in this development, but (more strongly) analysts see banks being revised in a positive direction, indicating that the situation is not as bad as initially thought.


Russia and Romania are the cheapest markets based on consensus estimates and book value

Russia and Romania are the cheapest markets based on consensus estimates and book valueEven though valuations are not as inviting as they were earlier this year and P/E has increased to a level of about 11 for the CEE region, Russia and Romania continue to be the cheapest markets based on consensus estimates and book value.

Although the markets grouped as SEE posted an impressive performance in 2Q 2009, Erste analysts continue to keep them at underweight.

“In the past, we have been fans of the Romanian market and have always mentioned this market for anyone considering an investment in this region. We continue to do so”, analysts said. Erste said recently Romania’s current account gap would sharply contract this year, to 5.7% from 12% of GDP in 2008, and that it would be 75% filled by foreign direct investments and capital inflows related to European funds.

In the second quarter this year, BET index, that gauges the performance of ten most liquid stocks at BSE increased by 40.6%. The biggest increase was registered by PFTS index in Ukraine, of 84.2%.

Specialists recommend a cautious approach toward equity investments in Russian market as it is considered relatively speculative and largely driven by commodity prices. In contrast Erste recommends Turkey as it certainly shares its burden in terms of weakness, but at the same time it still offers a good alternative also in terms of market size.