Economic weakness and “even recession” are still visible in Central and Eastern Europe, but “the downturn is likely to bottom out” in the first quarter of the year, the analysts wrote in their outlook for the region.
They don’t expect the eurozone debt crisis to “massively escalate,” although “the trouble is not over.”
Stock markets in the region are likely to see a slow start to 2013 after the strength of 2012, the analysts said.
“Taking profits and consolidating a bit would be nothing negative in our view, in particular since we believe that it was mostly a change in the view on risk that has been moving markets. We tend to see stronger upside to kick rather later in 1Q 2013, in particular,” said Henning Esskuchen, head of CEE equity research at Erste Group.
Erste Bank analysts’ strongest call is to switch from Turkey towards Russia.
“Combining the somewhat stretched situation of Turkey after its stellar performance with the fact that liquidity momentum is indicating potential points of reversal for both markets – in different directions – we would not be surprised to see a shift in liquidity towards the Russian market,” they wrote.
“We stress that this is a bit of a bet and feel more comfortable with the Turkish part of the argument than with the Russian,” they added. They stressed that last year was a “unique year” for Turkey, as the country managed to rebalance domestic and external demand without going through an economic contraction.
For this year, the analysts forecast increased economic growth, a relatively stable currency and an upgrade to investment grade by other rating agencies following Fitch’s upgrade last year. But they also highlighted the fact that the ISE index had a “stellar performance by delivering some 60% return in USD terms in the year to date.”
“In summary, we may see profit-taking activity in equities in the early months of 2013 as investors digest their recent gains,” they said.
“Nevertheless, we believe that such profit-taking will be short-lived as the strong economic outlook and expectations associated with a possible rating upgrade will outweigh any pessimism in the market.”
Another bet by the Erste Bank analysts is that Romania and Serbia will benefit from “their status as frontier markets, assuming that the overall view on risk remains positively biased,” as they still have some upside potential left.