Summer Vigour

After having corrected somewhat in June, stock markets across Eastern Europe developed very positively in July. But the picture is not uniform and a few interesting observations emerge when analyzing the performance during the past month and the first half of the year.

The most obvious conclusion is that Turkey outperformed during the first half of the year and continues to outperform whereas Slovakia has and continues to underperform. The accumulated year to date performance, illustratively, puts these two markets on opposite ends of the spectrum in the region with Turkey having gained over 75% whereas Slovakia has dropped almost 13% (as of August 5). It should, however, be noted that Turkey was one of the markets falling the most in 2008 while Slovakia was one of the strongest. And the two markets are actually the strongest in the region in terms of performance since their respective peaks before the global financial crisis broke out. The Turkish market has been rallying on the back signs of economic recovery, a series of interest rates cuts and enviable performance of the banking sector, which helped Turkish equities to rise for the fifth consecutive month in July. The Hungarian market, which previously underperformed during a long period, has also outperformed throughout this year and is the third best market in the region year to date.

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A second group of markets did really well during the first half of the year and noted gains during the past month although below the benchmark or vice versa. Russia and Ukraine belong to the former with strong performance during the first six months and only modest gains in July whereas the Czech and Romanian markets did really well in July after a more hesitant first half of the year. All these markets have gained over 30% year to date although the momentum has varied significantly. The Russian market had a phenomenal rally between late January and early June as the oil price increased rapidly and the rouble started to appreciate after the managed devaluation in the winter.

A third group of markets – including Lithuania, Estonia, Croatia, Slovenia, Bulgaria, Kazakhstan, Serbia and Latvia – have underperformed in the first half and/or noted negative performance in July or vice versa. None of these markets have gained more than 20% year to date and some are more or less flat although not in negative territory. It is, however, encouraging that all of these markets, except for Slovakia and Slovenia, have started to perform in early August and thus show signs of more rapid recovery. But the most interesting market is arguably the Polish, which was one of the weakest in the region in the first half of the year, as it gained over 25% in July. It seems like the strong macro economic situation – one of the few economies throughout Europe with positive growth in the second quarter – and relatively prudent banking sector is finally starting to pay off on the stock market.

The thesis we have developed throughout the year, i.e. that the larger markets should be the first to benefit from the rebound, thus seems to hold. There have been concerns from investors that fear they have missed out on the recovery in these markets. But it is important to remember that most of these are still far from their pre-crisis peaks, which suggests there is plenty of upside potential just to get back to scratch. Moreover, as the economic situation stabilises further and investors gradually become less risk averse, focus will shift to smaller markets and smaller companies. Last year’s correction has created unique opportunities to invest at very attractive valuations, which is an environment that suits stock-pickers like East Capital.