2015: Low oil price and ECB policy as key triggers

From the Austrian point of view, the local equity market performance in 2014 hardly gives reason to pop the champagne. The leading Austrian index ATX was down by -13% for the year and hence clearly among the laggards by international comparison.

This muted performance is attributable to the following factors: 1) the Ukraine crisis and the associated sanctions on Russia which contributed to a considerable slowdown of the Russian economy, 2) a weaker than expected economic recovery in the Eurozone, 3) the low oil price (because of the high index weighting of OMV) and 4) the Asset Quality Review of banks, which precipitated additional negative valuation effects. As a result, the relatively high index weighting of financials, oil stocks and companies with exposure to Russia and Ukraine was a major culprit for the significant underperformance. In addition, Austrian companies issued a disproportionately high number of profit warnings last year. Maybe this was also due to the launch of the Austrian Financial Reporting Enforcement Panel, a new supervising body, which could have prompted some companies to apply more conservative accounting policies.

Based on earnings estimates for 2014 the ATX valuation appears fairly expensive on account of high impairments and write-downs by banks (which are in part a consequence of the AQR, regulatory changes especially in Hungary and the Ukraine crisis) but also by other companies, e.g. utilities and telecoms. As regards the index P/E ratio based on earnings estimates for 2015, by contrast, the current index valuation of 11.0 is below the long-term average. Nevertheless, further revisions of earnings estimates may be on the cards for some index heavyweights due to the continuing oil price decline, the persistent crisis in Ukraine and the substantial recession in Russia coupled with a significant depreciation of the Russian rouble.

By and large, we take a bullish stance regarding this year’s equity market environment in the region Austria/Eastern Europe. Economic growth in the Eurozone is expected to accelerate to slightly above 1%, and particularly the core CEE countries such as Poland, the Czech Republic, Slovakia or Hungary should attain growth rates of some 2.5%-3.5% and positively stand out from the pack in relative terms. This development is likely to underpin the business performance of companies on the one hand and strengthen investor interest in the region Austria/Eastern Europe on the other hand. Additional support should come from the expansionary monetary policy of the European Central Bank. While signs in Europe rather point towards quantitative easing, we anticipate interest rate hikes in the USA to start around the middle of the year. Consequently, the expected persistent weakening of the euro vs. the US dollar will in general have positive effects on the business performance of listed companies in the region this year. From the corporate point of view, the positive consequences of rising export sales clearly outweigh the adverse impact of input cost increases in US dollar terms. Rather than massive earnings growth, lack of investment alternatives in a low interest rate environment still is the principal argument speaking in favour of equities in Europe. Against this background, above all dividend stocks still appear interesting despite their partly good run in 2014.

The main risks continue to be 1) the impact of the Ukraine crisis and the associated sanctions as well as the negative effects of the low oil price in particular regarding Russia, 2) the discussion about a haircut for Greece – and a possible exit from the Eurozone – which is raising its ugly head again and 3) a possible correction on the US equity market in the wake of the Fed’s departure from a more expansionary monetary policy path.

Author:
Stefan Maxian
Vice President of ÖVFA
Head of Department Company Research
Raiffeisen Centrobank AG
8 January 2015