Chancing on EEMEA equities, in pictures
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Emerging Markets

Chancing on EEMEA equities, in pictures

Valuations for Eastern European equities are attractive despite the risks, say analysts at Credit Suisse

And now the case for the glass-half-full-demographic.


Yes, growth is weak in the EEMEA region - but it’s not as bad as analysts had predicted, if some of Wednesday's fourth-quarter economic stats are anything to go by.


But let's get the bad news out of the way first. On Wednesday, the Czech Republic became the first economy in central and eastern Europe to slide back into technical recession, with a 0.3% quarter-on-quarter GDP decline in the last three months of 2011, after a 0.1% drop in the previous quarter. Romania’s economy also contracted 0.2% q/q in the fourth quarter.


The good news: Hungary seemingly defied economic gravity, expanding in the fourth quarter at 0.3%, despite a blow-up in its domestic financial markets. What’s more, the Slovak and Bulgarian economy outperformed expectations, growing 0.9% and 0.4% respectively. Even growth in Germany was not as bad as most predicted. 


In short, these results, generally speaking, were better-than-expected. 


Perhaps these stats are enough to embolden equity bulls in the region and inspire flows to continue - with EMEA equity funds enjoying positive net flows year-to-date for the first time since May 2011. On Wednesday, Credit Suisse waded in to make the following bullish call:


We continue to believe that the best opportunities in country allocation to take advantage of our 12% projected regional upside to year-end are in Russia (10% o/w), Hungary (10% o/w) and Poland (5% o/w). Relative to their 10Y historical average sector-adjusted PER multiples these countries are trading at discounts of 31%, 15% and 15%, respectively, compared to Turkey (benchmark), the Czech Republic (benchmark) and South Africa (10% u/w) which are trading on premiums of 4%, 3% and 4%, respectively.

The bank raised its year-end 2012 index target for MSCI EMEA to 400 from 375 previously, offering 12% US dollar upside from current levels, thanks principally to the Draghi liquidity machine. 


The report continued:


Egypt, Hungary, Turkey, Poland and Russia rank in the top seven best performing MSCI emerging markets since 1 January with Czech Republic and South Africa being the notable laggards.
Regionally, EMEA has performed in line with overall emerging markets, marginally underperforming Latin America year-to-date. The contribution from FX gains above that of local currency equity performance is most pronounced in EMEA and Latin America. 

...valuations remain supportive for additional upside from here given that year- to-date earnings delivery and earnings forecasts have almost been commensurate with price performance leading to little expansion in either trailing or forward earnings multiples.

Trailing and forward PER multiple expansion back to their respective 15-year trend lines— not too demanding an outcome from our perspective—(assuming flat trailing and forecast earnings from here on to year-end 2012) allows for 18% and 15% upside for MSCI EMEA, respectively, versus 12% potential upside from current levels to our new index target of 400.

The story in pictures:


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And their valuation calls in more detail:


 We continue to believe that the best opportunities in country allocation to take advantage of our 12% projected regional upside to year-end are in Russia (10% overweight), Hungary (10% overweight) and Poland (5% overweight). Relative to their 10-year historical average sector-adjusted PER multiples these countries are trading at discounts of 31%, 15% and 15%, respectively.

We recommend a benchmark stance on Turkey and Czech Republic (now at 4% and 3% premiums to their 10-year historical average sector-adjusted PER multiples, respectively) and 10% underweight South Africa (also now trading at a 4% premium versus history).

On Egypt we are benchmark although the market remains relatively cheap versus history—at a 23% discount to its 10-year historical average sector-adjusted PER multiple.


More generally, Credit Suisse reckons the EM equity rally has legs, citing this litany of factors:


(i) improving momentum of emerging market relative industrial production growth; (ii) global excess liquidity has recovered back into positive territory; (iii) a more stable G7 yield curve takes the pressure off cyclicals relative performance; (iv) speculative positions on the dollar are close to record net longs; (v) in our view emerging market lead indicators will recover into 2012 led by China, (vi) earnings revisions breadth is stronger in emerging markets relative to developed; (vii) softening inflation in China (and EM more broadly) allows for policy stimulus; (viii) trend relative value creation for EM versus developed has continued to improve; (ix) emerging markets still remain relatively under-owned by global equity funds; and (x) relative valuations of EM equities are now more attractive than January 2011.  

One can think of many downside risks. So here is our highly original conclusion: It all depends on how the eurozone farce plays out. ☺

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