Industrial cycle cooling down in Austria
After strong growth in 2018 where the Austrian economy peaked around mid-year, the economic cycle has now entered a downward phase. For the second half of 2019, WIFO (the Austrian Institute of Economic Research) expects the economy to stabilize. The weakness is primarily due to the developments in connection with the main trading partner, Germany, and largely affects the manufacturing sector. Private consumption has lost momentum as well in recent quarters. The automotive industry, whose output fell significantly in the second half of 2018, plays a crucial role in this context.
Analysts envisage an only moderate increase of inflation. The CPI is expected to rise by 1.7% in 2019, after 2.0% last year. The increasingly tighter labour market has so far not really affected inflation. The budget benefits from the favourable economic activity, a decline in interest expenditure, and the positive development with respect to the winding-up of the nationalised banks. Government debt in terms of GDP was slightly positive for the first time since 1974 last year at +0.1%, according to Statistics Austria.
| 2016 | 2017 | 2018 | 2019 expected | |
|---|---|---|---|---|
| Real GDP in % | 2.0 | 2.6 | 2.7 | 1.9 |
| Inflation rate (CPI) in % | 0.9 | 2.1 | 2.0 | 1.7 |
| Unemployment rate in % (of employed people) | 6.0 | 5.5 | 4.9 | 4.6 |
| Budget deficit in % of GCP | -1.6 | -0.8 | -0.1 | +0.4 |
Source: WIFO, Statistics Austria, 29 March 2019
Central bank cautious with monetary policy
Motivated by the strong economic growth of recent years, the central banks have started a regime of gradual normalisation in the developed economies. The US central bank is the pioneer in this field and has gradually raised the Fed funds rate to 2.25% (lower end of the bandwidth). Due to the recent economic data from the USA, the market participants are currently not expecting any further rates hikes.
In the Eurozone, the goal of the European Central Bank is to step up the resilience of the banking sector and thus of the entire Eurozone economy. This is to be achieved by new edition of the TLTRO programme, which provides long-term affordable liquidity to banks at great volumes. Also, the ECB has pushed back the earliest date of the initial interest rate hike to the beginning of 2020. However, the room to manoeuvre in monetary policy is limited, and the similarities to a so-called liquidity trap (“Japan scenario”) are striking.
Hard Brexit or extension of extension
Brexit is currently overshadowing most other issues in Europe. The bond markets have the risk of a hard Brexit priced in already. The yields of 10Y German government bonds have turned negative and illustrate how risk-averse investors currently are. Generally speaking, Brexit is the Sword of Damocles above the European markets. However the story ends, the UK is unlikely to get away unscathed, judging from an international perspective.
ATX with relatively high dividend yield of 3.2%
The ATX, the leading index of the Vienna stock exchange, has gained a substantial 14% in the year to date (as of 8 April 2019). It has thus outperformed Germany (DAX +13%) and came close to matching the S&P 500 index (+15%). This upswing recovered the larger part of the massive losses of November and December 2018.
Its fundamentally attractive valuations make a case for the ATX. On the basis of expected company earnings for 2019 the price/earnings (PE) ratio is at 10.9x, i.e. clearly below the average of Europe (14.3x; source: Bloomberg, Factset).
As long as the positive earnings trend continues, share prices will be following this trend. The dividend yield of 3.1% (as of 31 March 2018) remains a buying argument in view of the zero interest-rate policy of the ECB. In the absence of a recession looming on the horizon, dividend titles will remain preferable to government bonds.
Performance of ATX, DAX, and S&P 500 (- 5Y; as of 5 April 2019)
Performance exclusive of fees, duties, and taxes; past performance is not indicative of future developments.
Author:
Paul Severin
Head of Communications Erste Asset Management
Member of the board of OVFA
8 April 2019
 |  |
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.