Emerging European Equity Markets’ Valuation – Opportunity?
The Emerging European equity market has been underperforming the rest of the world so far in 2018. The sell-off started in late spring and the market fell significant. There has been only four other periods in the last 13 years when the Emerging European market has sold off more than 10% during a 2.5 month period.
First it was the financial crisis in 2008, then in October of 2011 due to European crisis, in June 2013 then the Fed started its tapering and in September 2015 when the oil price collapsed.
There are several different reason for the negative performance in 2018:
- The USD has been strengthening and higher US yields led investors to move out of risky assets
- Lower GDP growth in Q1 for Europe compared to expectations
- A delay in forming a new Italian government after the recent election has made the market to be concerned with Italy´s Euro membership among other issues
- Increased sanctions in Russia for US investors
- Trade war
- Steel tariffs
After all these negative examples it could be time for a potential recovery for EE equities. If the USD start to depreciate, if we would see more stabilizing yields and when the upcoming actions from the Fed are priced in and the oil price stay steady, we could have a bounce back in emerging European equities again. A risk to this more positive scenario would be if the USD keeps appreciating and the trade war between the US and its trading partners would intensify. The role of the EUR/USD is crucial for the outlook of Emerging markets going forward.
GRAPH 1 – Emerging Europe valuation – Consensus PE ratio
Source:Bloomberg, 20 June 2018
We favour Emerging Europe on the base of the recent underperformance and as the market has lagged the rest of the emerging markets since 2017. The Emerging European market is trading at attractive levels. The 12 month forward consensus price earnings for Emerging market are 14% and 7.5% for Emerging Europe. The valuation is also attractive from a historically perspective and is trading below its long term average. At every previous crisis the EE market has bounced back and performance has come back.
GRAPH 2 – Emerging Europe valuation – Consensus relative PE ratio
Source:Bloomberg, 20 June 2018
If you have any questions please contact Cecilia Person, Senior Equity Analyst and Investment Specialist at Alfred Berg Kapitalförvaltning AB, firstname.lastname@example.org.
Past performance is not an indication of future performance. The value of an investment in a fund can go up or down depending on market evolution and investors may not get back all of their initial investment. Alfred Berg assumes no responsibility for errors in the information. This is a marketing material from Alfred Berg Kapitalförvaltning AB. The fund’s KIID, risk class, fund rules and prospectus are available at www.alfredberg.com
On April 6th USA launched personal sanctions against Russian oligarchs from a so-called “Kremlin list” in response to Russia´s alleged interference in the US 2016 presidential election. The sanctions are in part introduced to satisfy members of the congress who have put pressure on the administration to act.
Italy pushes EU further into the crisis and Nordic political stability – Quantified
After the Brexit vote, the Austrian, Eastern European and Italian elections, it is clear that the EU has some issues to tackle. European citizens are expressing their concerns. The question is if the remedies will be in place in time to avoid a too damaging blow to the union and the Euro (EUR) potentially through bigger anti-EU parties coming into power.
Investments in funds are always related to risk. Past performance is no guarantee of future results. Performances are calculated net of fees. Investments in funds are subject to market fluctuation and risks inherent in investing in securities. The value of investments and the revenue they generate can increase or decrease and it is possible that investors will not recover their initial investment.