High returns period winding down
Dow Jones hit the all time high and DAX is not far behind thus, unexpected economic or political shocks may give investors the perfect incentive to mark their profits, but the effects should be transitory. A trend reversal could be triggered by signs of fatigue in the global economic activity or a slowdown of the monetary easing programs, but we do not expect these to materialize in the short run, thus we see the market trending upwards on the short term.
Local market outperformed foreign markets as the air cleared after the parliamentary elections and as the inclusion of local bonds in global indices drove yields lower and led to RON appreciation. With limited risks from the local political scene and with the economy on an upward trend in 2013, though minor, on the short term we anticipate the Bucharest Stock Exchange to continue to follow the evolution of external markets. Despite delays from the initial schedule, the State offerings, part of the agreement with the IMF, have the potential to create some positive momentum, driving the interest of foreign investors towards the local market.
Dividend plays are an interesting trading idea on the short term as dividends season just started. There are several attractive companies from the local universe which could provide significant yields (e.g. SIFs, Fondul Proprietatea, OMV Petrom). We continue to recommend investments in companies with strong fundamentals. Fondul Proprietatea (FP) remains a top pick due to the large discount to NAV, imminent share buyback program of up to 8% of the share capital and a predictable dividend policy. We have recently upgraded our recommendation for OMV Petrom (SNP) from “hold” to “buy” as we see an upside for the E&P segment from gas price liberalization. Three of the SIFs remain on our “buy” list though their discount to NAV has narrowed. As regards to the financial sector, we prefer Banca Transilvania over BRD-GSG, as we consider that its current valuation is less demanding. Nevertheless, given the powerful rally of the stock over the last year we placed it on our “hold” list, while we recommend reducing the exposure on BRD-GSG which is trading at a 2013e P/BV of 1.0x and a ROE below the cost of equity. We also like the generics producer Biofarm (BIO), as its exposure on OTC protects it from legislative headwinds, but we see competition rising which leaves it less chances of outperformance going forward. We also keep on our watch list prospecting company Prospectiuni (PRSN) which we expect to deliver strong top line results in 2013, however its profitability could remain under pressure.
Investors’ increased their risk appetite during 2H 2012
The bearish views of an euro-zone break-up did not materialize during 2H 2012 and Mario Draghi’s pledge to do “whatever it takes” to save the euro dispelled the pessimism and encouraged investors to embark on additional risk. Moreover, the last minute US deal on the fiscal cliff towards the end of the year prompted investors to continue their buying spree into 2013.
Local indices rose in line with their external peers
The local market also took part in the feast, with BET index up 18% in 2H 2012 and 11% ytd and BET-FI up 28% in 2H and 12% ytd. However, liquidity was dry over 2H 2012, with the average daily liquidity at EUR 5.4 mn, down 34% yoy. Over the period, Fondul Proprietatea (FP) accounted on average for half of the daily turnover, oil&gas producer OMV Petrom (SNP) accounted for 11%, while the SIFs for some 17%. During 2013, daily average turnover ytd for shares stood at EUR 6.8 mn.
On the macro side, real GDP inched up by 0.1% qoq in 4Q 12, after contracting in 3Q by 0.2% qoq, mainly due to a plunge in agricultural output, while adjusted, activity was roughly flat. Overall, real GDP increased by only 0.3% yoy in 2012, while, excluding agriculture, GDP expanded by around 1.8% yoy.
RON appreciated while RON yields decreased
In contrast with other currencies in the region, RON appreciated in the last months, while yields decreased, in the context of renewed appetite of non-resident players for RON denominated government bonds. The main trigger was the inclusion of Romanian local currency bonds in the Barclays and J.P. Morgan emerging market indexes. The ebullience on the bond market pervaded also the local stock market, reflecting in the indices’ evolution.
Correlation with international markets
Local stock market outperformed the evolution of external markets
Fuelled on the one side by the exuberance on foreign markets and ignoring the squabbles on the local political scene, the local stock market outperformed international markets during 2H 2012. As expected, after the results of the referendum for the impeachment of the president of July 29, the Socialist-Liberal Union (USL) secured a clear majority in Parliament in the elections from December 9 and quickly enforced its Government right before Christmas. We believe that the swift change in ruling coalition brought hopes for political stability. Driven also by the lower yields (due to the inclusion of local bonds in international indices) and RON appreciation, BET increased by 18%, while BET-FI rose by 28% during 2H, whereas Dow Jones and FTSE advanced by 4% and 9% respectively.
Abundant liquidity on the markets and lower systemic risks support equities growth
ECB actions have reduced significantly the disintegration risk of the Eurozone, boosting investors’ confidence. The abundant amount of liquidity supported the rise in equities which continued also in the first months of 2013.
The latest manufacturing PMI (Purchasing Managers' Index) for Europe (47.9 in February, unchanged vs. January) signalled a deterioration in business conditions for the nineteenth successive month, but the rate of contraction remained one of the weakest seen during the past year. While the number of signals for an upswing in Germany is increasing, France (Feb. PMI of 43.9) and Southern Europe, among which the largest economy Italy (Feb. PMI of 45.8), are clearly lagging behind. While on the short term the manufacturing sector is likely to drag the overall economy, it seems that the downturn is close to the bottom and we expect a revival during 2H.
Further upside potential on the short term for equities
Equity markets have the potential to rise further on the short term supported by the low interest environment and extra blanket of liquidity supplied by the Central Banks. However, unexpected economic or political shocks, as it was the case recently with the surprising results of the parliamentary elections in Italy which generated a political blockage in the country, may give investors the incentive to mark their profits thus we could expect increased volatility. On the short term, hopes for a revival of economic growth and the prolongation of the easing programs continue to provide steam for equities growth. For the moment, markets seem to absorb easily bad news (i.e. automatic spending cuts in the US amounting to USD 85 bn), but if data regarding the real economy will not confirm investors’ optimism and at the first signs that the monetary easing programs would be cut or no longer prolonged, we could see a trend reversal. Nevertheless, given that the markets kept on rising since December 2012, we do not exclude minor corrections on the way.
In 2013 we expect the real GDP excluding agriculture in Romania to move up by 1.2% yoy, and the public budget deficit to come in slightly lower than in 2012, at 2.2% of GDP. With limited risks from the local political scene and with the economy on an upward trend, though minor, on the short term we anticipate the Bucharest Stock Exchange to follow the evolution on external markets. The State offerings, part of the agreement with the IMF, could create some positive momentum, driving the interest of foreign investors towards the local market.
Several interesting local dividend plays
Additionally, dividends season just started and given the current low interest rate environment, dividends have become an important factor in the investment decision. There are several interesting plays from the local universe which could provide significant yields
Activity of local pension funds
Equities exposure of local pension funds is still low
At the end of January 2013, the net asset value of the mandatory private pension funds stood at almost RON 10 bn (EUR 2.28 bn), up some 49% yoy and up 3.6% mom, with more than 5.8 mn registered persons in the system, up 4.6% yoy. The cumulated monthly contribution in January 2013 stood at some RON 222 mn (EUR 51 mn), up some 26% yoy.
With regards to the allocation of funds to asset classes, the weight of government bonds stood at 75% of total assets, significantly above the level registered in January 2012 when it reached approx. 67%, most of the rise being supported by a correspondent fall in the weight of bank deposits. Shares weight remained low compared to other regional markets at 11.5% (36% in Poland at the end of Jan 13). In absolute terms, shares represented at the end of January 2013 some RON 1.15 bn.
The contribution that will be transferred to private pension funds from the gross salary of each employee was raised by 0.5 percentage points to 4%. The increase in contribution should bring an additional RON 32 mn/month into the system (assuming similar number of contributors and average contributions as in January 2013).
Net asset value for the Optional Private Pension System (Pillar III) stood at RON 618 mn, up 36% yoy. Shares weight in total assets stood at the end of January 2013 at approx. 15.6% (RON 97 mn), up from 14% in January 2012.
Risks in 1H 2013
Even as local political disputes eased, several important decisions still depend on the willpower of the Government
The risks flagged in our last report regarding the expected turmoil on the local political scene before parliamentary elections had little impact on the evolution of the domestic stock market. Going forward we do not see significant risks stemming from the local political arena, at least until 2014, when presidential elections will be held.
However, the privatizations of several SOEs, the closing of a new agreement with the IMF and imposing structural reforms still depend on the willpower of local politicians. The failure to sign a new agreement with the IMF may be perceived as negative by the markets, as this was seen as an anchor of stability. Moreover, at present it is difficult to assess the impact of the gas and energy price deregulation on industrial consumers, and the impact could be stronger than currently anticipated, thus hampering economic growth. Furthermore, we believe Romania lacks a clear energy strategy, to be used as guidance by energy market players.
As regards to external markets, most of the headwinds and risks seem to have diminished, at least for the moment, as worries about a Eurozone doom faded, the fiscal cliff has been temporarily averted and growth in China remained reasonable. The still supportive liquidity environment continues to support the strong performance of equities, driving the markets to all-time highs. However, signs for a delay in the revival of economic growth or the slowdown of monetary easing programs may signal a trend reversal.
Equity market valuation
Average market 2013 P/E estimated at 11.6
We follow some 45 most liquid companies listed on both BVB main market and Rasdaq. According to our estimates these companies are traded at an average 2013e P/E of 11.6.
Sales for these companies increased as a whole by 10% yoy during 2012, supported by a good performance of oil&gas and healthcare companies which we expect should also sustain sales growth in 2013. Sales of consumer goods companies (e.g. Albalact, Vrancart, Boromir Prod, Bermas, Braiconf) should slightly revive (+2% yoy vs. a 3% yoy decrease estimated for 2012 – not all reported their FY 2012 results). The laggards in terms of sales evolution in our view continue to be industrial services players (Remarul 16 Februarie, Remar Pascani).
We anticipate only a feeble increase in margins for 2013 with utilities expected to post improved margins yoy while margins for construction and materials companies are expected to remain in red (e.g. Impact Developer & Contractor, Cemacon).
Low interest environment and easing programs fuel investors’ optimism
Foreign stock markets started 2013 on the rise and equity indices hit or came close to all time highs. The low interest rate environment driven by the rich liquidy due to easing programs urged funds from safe havens towards more risky assets (i.e. equities) in search of additional yield. The exuberance was fuelled by expectations that the worst has been overcome, Europe will start to gain traction and economic growth will resume. Unexpected economic or political shocks may give investors the perfect incentive to mark their profits, but the effects should be transitory. A trend reversal could be triggered by signs of fatigue in the global economic activity or a slowdown of the monetary easing programs, but we do not expect these to materialize on the short term, and we see the market trending upwards in the short term.
In the absence of major risks stemming from the local political arena and with the economy on an upward trend, though minor, the domestic market should follow the dynamics of international markets. A slight revival of domestic consumption due to the increase of salaries of public servants together with an improvement in external demand and an increase in absorption of EU structural funds should sustain a real GDP growth of approx. 1.2% yoy in 2013 (excluding agriculture). Despite delays from the initial schedule, the State offerings, part of the agreement with the IMF, have the potential to create some positive momentum, driving the interest of foreign investors towards the local market.
On the short term we recommend several dividend plays (e.g. SIFs, OMV Petrom, Fondul Proprietatea, several small caps), while on the medium term we recommend companies with strong fundamentals. Among the latter, Fondul Proprietatea remains one of our top picks due to the attractive dividend yield, the large discount to NAV and the iminent share buyback program for 8% of its share capital. OMV Petrom is also on our “buy” list as we see an upside from the for the E&P segment from gas price liberalization.
* ytd refers to Jan., 1 - March, 12 2013
Red the full report in the attached pdf document
the full report in the attached pdf document.