Emerging Europe Equities Weekly – 8th December 2017

11.1% GDP growth! Seriously?


The Emerging European 10/40 index gained 1.5% last week and performed in line with MSCI World index at 1.5% while Global Emerging market was slightly weaker at 0.8%.

Turkey rallied 8% last week and regained some of previous weeks´ s underperformance while Greece was the weakest market in our universe and lost -1.1%. All numbers in EUR.

Consumption …

The low interest rate environment for the last two years in Poland has led to higher retail sales, a very strong housing market and expanding GDP numbers. The latest GDP number for Q3 was very strong across the whole CEE area (Poland, the Czech Republic and Hungary).

Czech Republic 5.0 4.7
Hungary 3.6 3.2
Poland 4.7 4.0
Russia 1.8 2.5
Germany 2.8 2.3
EU 2.5 2.3

We believe the robust economic growth and low interest rates environment in Central Europe should continue to boost the market into 2018. The CE3 is a leveraged play on the rest of Europe as 80% of Central Europe’s exports are shipped to the EU region and is a positive growth driver. The Polish economy also got a boost from the 500+ programme which is giving families an extra 500 zloty a month in child benefit.

The interest rate is now 1.5% in Poland and a hike could be expected by the end of 2018. A potential rate hike is likely to hamper the retail sales growth but the time delay between changes to monetary policies and economic impacts, in combination with increasing wages, lead to that we think a positive retail sales scenario is highly likely. On the other hand could growth in operating cost cause margin pressures to the sector, especially if sales growth would come down.

And growth …

The Q3 number for Turkey was just released at 11.1% yoy which was higher than consensus forecast of 8.5%. Turkey was the highest growing country among the G20 countries in 3Q 2017 and in second place came China at 6.8%. The low base effect from Q3 2016 helped the Turkish growth reach double-digit numbers in Q3 2017. The early growth indicators for Q4 suggest there is still good momentum. The Turkish deputy prime minister Simsek is suggesting that the GDP for the full 2017 is expected to be around 6.5% which would make the growth among the strongest in Europe.

The two main contributors to the strong growth in Turkey were:

  1. Consumption, which was very strong and came in at 7% partly helped by special consumption tax cuts on a number of home appliances and lower unemployment rates pushing retail sales.
  2. Investments were strong, especially in the machinery and equipment part of investments, rising to an all-time high after two quarters with slowing numbers.

Then breaking the numbers down, the machinery and equipment numbers are positive with regard to the sustainability of the economic growth going forward. On Dec 14 the central bank of Turkey will announce any interest rate changes and the expectation is for a 100bp rise of the late liquidity window. Subsequently the inflation number is expected to come down in the beginning of 2018.

Cecilia Person
Senior Equity Analyst and Investment Specialist

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