Equity markets had a difficult year in 2018, although the year had started off on a euphoric note thanks to effects of the US tax reform and the ensuing jump in US earnings estimates. Also euro area equity indices were at or close to their all-time highs at the beginning of the year but failed to reclaim these levels later. The headache started in February, when factors such as declining earnings growth estimates, more hawkish Fed statements, disappointing economic data and the dispute between the EU Commission and Italy over the country's budget plan started to weigh on sentiment. The trade conflict provoked by the Trump administration compounded the downtrend.
The Vienna Stock Exchange was not immune to this trend. The ATX suffered a decrease (-18%) similar to its German counterpart DAX last year – a more pronounced decline than the broad European market (Eurostoxx 50: -12%). The ATX managed to keep pace with the Eurostoxx until December, but then the announcement of a high bank tax in Romania and the substantial oil price drop impacted the index heavyweights Erste Group and OMV.
The Verbund share was the best performer of the ATX last year and increased by some 84% due also to the electricity price trend, followed by Do&Co (+71%) – bolstered by major catering contract awards and extensions – and CA Immo (+7%). The biggest laggards were voestalpine (-47%), AT&S (-35%) and SBO (-32%).
Based on expected earnings growth of 7% for the current year the ATX is valued at a P/E ratio of some 10x, significantly below the long-term average of about 12x. This reflects expectations that there are more earnings revisions to come and the recent deterioration in visibility regarding order levels in several industries (e.g. automotive suppliers).
As a result of the low valuation, pullbacks can be rather strong. In 2019 ytd, the ATX is up some 6%. We expect this market recovery to continue in the short term because the economy and the upcoming reporting season are likely to have positive effects. As a result, there should be no reason for any major earnings revisions.
The economic environment is expected to continue to provide tailwind both in Austria and CEE, albeit with slowing momentum. We expect GDP growth of 1.7% in Austria in 2019e and 1.4% in 2020e. In the CEE region (PL, HU, CZ, SK, SL) GDP growth is anticipated to come to 2.5% in both years and for the SEE region (HR, BG, RO, SE, BH, AL, KO) our estimate is 2.7% for this year and next.
A tax reform is in the making in Austria, and it could bring additional economic stimuli: a corporate tax cut (potentially only for retained earnings) could boost earnings in 2020 or 2021.
Additional signs suggesting that the recovery might continue are sentiment indicators which are already very negative and the jump in volatility at the end of December. Such signals often coincide with correction lows. Nevertheless, we believe that growth concerns are likely to resurface in the second half of the year, not least because we see high risks of a recession in the USA in 2020. Therefore, equity markets are then likely to weaken again in anticipation of a significant slowdown of growth.
Author:
Stefan Maxian
Vice President of ÖVFA
Head of Department Company Research
Raiffeisen Centrobank AG
10 January 2019
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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.