The ATX ended the month of September with a price decline of 7.1%. Unfortunately, this is nothing out of the ordinary; looking back, one has to note that the months of June and February had an even worse performance this year. Since the beginning of the year, the Austrian benchmark index has lost more than 30% of its capitalization, the Stoxx Europe 600 is down just over 20%, and sentiment is at a low point. The fear of recession is spreading, the probability that Germany will slide into a recession in the next 12 months is currently close to 80%, according to analyst estimates. The economic downturn is compounded by high inflation, which has become a global phenomenon and which the central banks are now fighting with all means and at any cost. Added to the interest rate fears are the risks of an expansion of Putin's war against Ukraine and further geopolitical upheavals. So, at the moment, there is little to nothing in favor of equities, except perhaps valuation?
We look at the P/E ratio (price/earnings ratio) of the ATX, which has been falling from one low to the next for months and has now reached a value of 5.6x at the end of September, which is not even half of the average of the last 10 years (this is currently 13.1x). The reference to the fact that some heavily weighted companies in the ATX are benefiting from higher energy prices and will therefore show exceptionally high profits this year, which will depress the P/E ratio, is correct in principle. However, according to analyst estimates, the ATX should also be able to generate similarly high profits in the coming years, on the basis of which P/E ratios of 6.2x can currently be calculated, which applies to both 2023 and 2024. Incidentally, the P/E ratio of the Stoxx Europe 600 is currently 10.8x, which is also the lowest value in the last 10 years.
The earnings yield of the Austrian benchmark index now amounts to 17.8%, which is 15 percentage points more than the yield of 10-year government bonds. This ‘risk premium’ of 15 percentage points is also a record value and reveals the massive uncertainty regarding the economic outlook and geopolitical tensions. Given this extraordinarily high risk premium, one would almost be inclined to claim that everything is already priced in. But this is obviously not the case, as a look at the technical analysis shows: there is no sign of a bottom yet.
We venture a vague look into the future. Inflation is likely to have finally peaked and to decline somewhat in the coming months. Much depends on the development of energy prices, which are considered the main driver of inflation in Europe. The fact that inflation in Europe is strongly supply-driven (‘cost push’) should be seen rather positively, as a fall in energy prices should also be reflected in a fall in inflation. However, how quickly core inflation (inflation excluding energy and food prices) will react to a fall in energy prices is uncertain and thus remains a risk factor for the inflation outlook. As for the economic outlook, the increasing visibility should help to better manage the pain, growth slowdown or recession included. We therefore paint a cautiously positive picture (at least in the medium to long term). ‘Dum spiro spero’ – ‘As long as I breathe, I hope’ (Cicero).
Author:
Christoph Schultes, MBA, CIIA
Chief Equity Analyst Austria
Erste Group Bank AG
4 October 2022
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Note
Wiener Börse AG would explicitly like to point out that the data and calculations given in this report are historic values, which do not permit any conclusions as regards future developments or value stability. Price fluctuations and loss of capital are possible in securities trading. The contribution is the personal opinion of the analyst and does not constitute a financial analysis or a recommendation for investment by the exchange operating company, Wiener Börse AG.