Emerging Europe Equities Weekly – 15th December 2017

Contrasting Central Banks !


The Emerging European 10/40 index gained 1.8% last week and outperformed both the MSCI World index at 0.5 % and the Global Emerging market benchmark at 0.6%.

Greece rallied 3.7% last week and regained some of previous weeks´ s underperformance while Hungary was the weakest market in our universe and lost -0.5%. All numbers in EUR.

Interest rate changes …

Last week we had two opposite interest rate changes. Both Russia and Turkey had central bank meetings and one central bank under-delivered and the other central bank surprised to the upside. In both cases inflation played a major role for the decision making process.

Turkey …

The central bank of Turkey hiked its late liquidity window by 50 bps to 12.75% versus the consensus expectations of a 100 -125 bps hike. Core inflation has moved from lower end of 9% to above 12% in recent months. The central bank acknowledges robust economic activity and a positive credit growth. The GDP growth for Q3 came in as 11.1% yoy and the CPI has increased due to the Turkish Lira weakness, higher oil and food prices.

Russia …

The central of Russia surprised the market with a 50 bp rate cut to 7.75% last week. Analysts had forecasted a regular 25 bp reduction as the CBR had not guided for anything else so the 50bp came as a surprise. In a statement, the CBR said it decided to cut the 50bp in a response to the extension of the Opec deal which limits the oil output into 2018. The Opec deal means lower risk of rising inflation.

When it comes to forward guidance the CBR is cautious and discusses the possibility of some easing in the first half of 2018. The possibility of a rate cut will also be impacted by any news regarding the upcoming presidential election in Russia, the US treasury sanctions and the increased FX buying from the financial ministry.

A week ago President Putin announced that he will be running for President again in the March 18 election as an independent candidate. His economic program consists of infrastructure development, health care and education. Putin argue that Russia is now more reliant on domestic demand after the oil price chock and the introduction of sanctions and means that the growth is now more sustainable than before.

The interest rate changes goes in two different directions with inflation playing a major part in the decision making. One can argue that the central banks did not deliver in accordance to that was required from them under the current condition and market outlook so the expectations on further rate changes in 2018 is high.

Cecilia Person
Senior Equity Analyst and Investment Specialist

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