Emerging Europe Equity Strategy Overview Henning Eßkuchen Head of CEE Equity Research +43 (0)

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1 Emerging Europe Equity Strategy Overview Henning Eßkuchen Head of CEE Equity Research +43 (0)

2 Disclaimer Cautionary note regarding forward-looking statements THE INFORMATION CONTAINED IN THIS DOCUMENT HAS NOT BEEN INDEPENDENTLY VERIFIED AND NO REPRESENTATION OR WARRANTY EXPRESSED OR IMPLIED IS MADE AS TO, AND NO RELIANCE SHOULD BE PLACED ON, THE FAIRNESS, ACCURACY,COMPLETENESS OR CORRECTNESS OF THIS INFORMATION OR OPINIONS CONTAINED HEREIN. CERTAIN STATEMENTS CONTAINED IN THIS DOCUMENT MAY BE STATEMENTS OF FUTURE EXPECTATIONS AND OTHER FORWARD-LOOKING STATEMENTS THAT ARE BASED ON MANAGEMENT S CURRENT VIEWS AND ASSUMPTIONS AND INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS, PERFORMANCE OR EVENTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED IN SUCH STATEMENTS. NONE OF ERSTE BANK OR ANY OF ITS AFFILIATES, ADVISORS OR REPRESENTATIVES SHALL HAVE ANY LIABILITY WHATSOEVER (IN NEGLIGENCE OR OTHERWISE) FOR ANY LOSS HOWSOEVER ARISING FROM ANY USE OF THIS DOCUMENT OR ITS CONTENT OR OTHERWISE ARISING IN CONNECTION WITH THIS DOCUMENT. THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER OR INVITATION TO PURCHASE OR SUBSCRIBE FOR ANY SHARES AND NEITHER IT NOR ANY PART OF IT SHALLFORM THE BASIS OF OR BE RELIED UPON IN CONNECTION WITH ANY CONTRACT OR COMMITMENT WHATSOEVER. 2

3 Correlations Seasonality TR EME What drives Emerging Europe? What was one of the worst starts into the year, turned into one of the best Correlations among asset classes increased EM closing the performance gap to DM Change in sentiment has provided a uniform driver for all asset classes EM coming from strong underweight facing relatively stronger impact Source: Bloomberg, Thomson Reuters, own calculations 3

4 RSI and Momentum EuroStoxx sector indices Flow alerts* Liquidity Change in sentiment redirecting liquidity towards emerging markets All dedicated EM USD - 636mn till 03/16 vs USD - 68bn in 2015 (shown in chart: ytd USD 6.28bn inflow vs USD 0.15 in 2015) Flows in particular hitting previous laggards those where lagging for a good reason now being pushed created fragile situation *daily flows to seven EM, typically accounting for about 50% of the 30 main EM globally, Source: EPFR, IIF, own calculations 4

5 Previous risks, new risks - What has changed? Interest rates FED/ECB, local central banks Concerns about politics Turkey, Poland, Brazil, Greece, Brexit, Growth Outlook for US, EU, EM vs CEE Valuation Growth expectations properly priced in or multiples expanded? Nationalism Opportunistic politics, Schengen Oil price A risk indicator, an indicator for growth, a residual of growth? 5

6 Weighting development, indexed TR/USD do politics matter? Previous risks, new risks - Politics Turkey Mostly a top-down risk impacting currency, yields Poland Sector taxes, CHF Interest rates Major central banks remain decisive CEE still on deflationary trend Poland with negative impact on banks Turkey most at risk FED, politics 3 FED hikes possible, June most at risk, FOMC still sees two hikes Source: Thomson Reuters, Bloomberg, Erste Group Research 6

7 Economic surprise indices GDP growth expectations 2016 and latest revisions Previous risks, new risks Economic Growth EM growth expectations/sentiment mostly steered by China, major commodity exporters CEE something else converging vs emerging A lot of typical EM risks do not apply to CEE anymore at cost of lower (but stable) growth Some dip in growth for CEE in 2016 due to shift in EU funding program (HU, CZ) Source: Bloomberg, IMF 7

8 Consensus earnings trend Poland Consensus earnings trend CEE Previous risks, new risks Earnings Growth Since beginning of 2016, HU, CZ and Turkey have posted the strongest earnings trends Poland has been on continued downward trend, also pulling regional average down Poland stabilizing on low levels, depending on further outlook for banking sector beginning of re-rating? Source: European Economic Forecast, Autumn

9 Valuation comparison global Previous risks, new risks Valuation Risk of liquidity multiple expansion was imminent Consolidation and stabilization in earnings trend supportive In global comparison valuation for CEE is at the lower end, so is growth No regional market excessively expensive, AT, HU, HR trading at relatively highest multiples Valuation CEE Source: Factset, Erste Group Research 9

10 Markets and sectors Interest rates Economic environment Commodity prices Currencies Regulatory environment Leading indicators 0% 10% 20% 30% 40% 50% 60% 70% Real Estate Consumer Discretionary Energy Basic Materials Information Technology Utilities Telecoms Consumer Staples Banking Health Care Industrials Insurance Valuation Combined 0% 20% 40% 60% 80% Information Technology Industrials Insurance Consumer Discretionary Banking Real Estate Consumer Staples Health Care Energy Basic Materials Telecoms Utilities Source: Erste Group Research 10

11 Contacts Visit page or type on Bloomberg ESTE <GO>. Erste Group Research Vienna) Fritz Mostböck, CEFA Head of Group Research friedrich.mostboeck@erstegroup.com Henning Eßkuchen Head of CEE Equity Research henning.esskuchen@erstegroup.com Juraj Kotian Head of CEE Macro/ FI Research juraj.kotian@erstegroup.com Zoltan Arokszallasi Chief Analyst CEE Macro/ FI Research Zoltan Arokszallasi@erstegroup.com Gudrun Egger, CEFA Head of Major Markets & Credit Research gudrun.egger@erstegroup.com Local Research Offices Bratislava Slovenska Sporitelna Head: Maria Valachyova +421 (2) valachyova.maria@slsp.sk Coverage: Slovakia Budapest Erste Bank Hungary Head: Jozsef Miro +36 (1) Jozsef.Miro@erstebroker.hu Coverage: Hungary Bucharest Banca Comerciala Romana (BCR) Heads: Radu Craciun Radu.craciun@bcr.ro Coverage: Romania Prague Ceska Sporitelna Head: David Navratil DNavratil@csas.cz Coverage: Czech Republic, Poland Warsaw Erste Securities Polska Head: Magdalena Komaracka Magdalena.komaracka@erstegro up.com Coverage: Poland Zagreb/ Belgrade Erste Bank Heads: Alen Kovac, Mladen Dodig , akovac2@erstebank.com Mladen.Dodig@erstebank.rs Coverage: Croatia, Serbia Istanbul Erste Securities Istanbul Head: nn Coverage: Turkey 11