ATX index is picking up speed

Sluggish economy in Austria

The improved scenario in the Eurozone has somewhat bypassed the economic situation in Austria, as the economy is only benefiting moderately. Domestic demand and exports are still comparatively weak, and the willingness to invest is still cautious due to the subdued sentiment. In spite of the minor improvement in growth the price pressure continues to recede. The Austrian Institute of Economic Research expects the CPI to decline from 1.7% in 2014 to 1.3% this year, and foresees a moderate increase to 1.6% in 2016.

Austrian rating very good in spite of the downgrade

Last year the public deficit rose on the back of the special item of Hypo Alpe Adria/HETA to 2.4%. Public debt in terms of GDP was at 84.5% at the end of the year. The rating agency Fitch downgraded Austria from the best possible rating of AAA to AA+. This means that now only Moody’s, the third of the three large US rating agencies along S&P and Fitch, rates Austria AAA. For the ongoing year the Austrian Institute of Economic Research (Wifo) expects the deficit to decline to 2.2%. A structurally balanced budget is currently unrealistic.

Negative yield of Austrian government bonds

The interest rates remain around the zero-percent threshold. In addition to the quasi-zero-interest-rate policy by the European Central Bank (ECB), the implementation of the extensive bond purchase programme and the negative interest rate policy have caused bond yields to fall drastically in the Eurozone.

The ECB policy has led the Republic of Austria to issue a federal government bond with a negative overall yield in March for the first time in history. The yields of Austrian government bonds in the maturity segments of up to five years are still slightly negative, while a 10Y Austrian government bond was traded at a yield of 0.33% as of 7 April 2015. As long as the ECB policy remains intact, this situation is not going to change any time soon.

Austrian equities have picked up some momentum

The ATX index has recorded substantial gains in the year to date, but has only just matched other European equity indices by comparison. The gap to the performance of the German equity index remains significant.

ATX available at book value

The weak performance of the past years has caused the entire ATX to be traded at book value at the moment (i.e. price/book value = 1x). This means that the stock exchange is regarding the future situation of the companies from a very unenthusiastic perspective. Future profits, investments, that are supposed to earn higher yields, and additional expected cash flows are currently not priced in. For long-term investors these valuations are very attractive. The day will come when the market participants will be seeing the future more positively. It is then that the market will be thinking back fondly of the current valuations.

Upward potential exists

For the performance of the overall market the performance of the five biggest companies of the ATX is crucial. The five biggest shares (Erste Group Bank, Andritz, OMV, voestalpine und Immofinanz) account for about 60% of market capitalisation of the ATX.

Globally speaking, large caps and companies from the technology and healthcare sectors are in particularly keen demand at the moment. The demand for smaller to medium-sized shares such as the ones that are traded on the Vienna stock exchange is less acute.

This may change at the blink of an eye. The relative valuation and the good development of the neighbouring countries in Central and Eastern Europe make a case for the Vienna stock exchange. All that is needed now is the positive investor sentiment.

Author:
Paul Severin
Board Member ÖVFA
Head of Investment Communications Erste Asset Management
9 April 2015