Relative undervaluation – is it time to buy Central and Eastern European stocks?

English2020. okt. 27.Növekedés.hu

Developed stock markets are soaring; they are much, much higher than the low point caused by the coronavirus outbreak half a year ago. Meanwhile, the Central and Eastern European region is making no progress. But what follows from this? Are western companies in a better situation? Will companies in our region become more expensive or maybe western companies will crash?

The numbers are staggering. It is worth looking back at the past six-seven months, as it was at the end of March that the world realized that the coronavirus would not spare European and American economies either, and the markets hit rock bottom.

Compared to the conditions half a year ago, however, the American Nasdaq is 40 percent higher. It is true that the most dynamic and resilient IT businesses are listed here, but even the more robust Dow Jones have already risen 20 percent. The German DAX and the Japanese Nikkei are 26 and 22 percent up, respectively. The British, Italian and French stock markets are a little fainter, but even these are at least 10-15 percent above the local minimum.

The Eastern European region is asleep

In the first days of October, BUX, the Budapest Stock Exchange index, was only 3 percent higher than six months ago, at around 33,500 points. The picture is similarly steady in the Czech and Polish stock exchange; it is hardly understandable how our region has failed to benefit from this substantial recovery.

We even fell behind emerging stock markets

In the present situation, however, it is particularly unusual that the Central and Eastern European region is not only lagging behind developed stock markets but also developing ones; as the Chinese, Russian, or Korean index is much more in line with developed markets than ours.
If we are seeing such a discrepancy, which is not justifiable with fundamental processes and profit changes, then

macro issues (changes in country risk or regional risk),

liquidity processes,

or investor confidence (investor sentiment) are factors to consider;

and we can trust that the prices will level off, ideally with an upsurge in our region and not with the bubble bursting in the west.

Is there any problem with the economy?

Let’s start with the most basic question: is there something wrong with economy? Of course there is, just like everywhere else nowadays. But the situation is not that bad.

Macroeconomic figures alone would not justify such a discrepancy. Of course, when the GDP goes down and public debt goes up, external vulnerability increases; and we can also admit that Hungary is one of the countries that have a higher public debt-to-GDP ratio.

Fortunately, however, there is so much money in the markets that the financing of the country is not a problem at all. We must make sure that the forint does not weaken too much; inflation is quite high now; we can see that the European Union itself is struggling with problems; EU funds are a bit uncertain; and yet, all these problems together do not justify the significant differences.

Liquidity

Our relative undervaluation can be much better explained by liquidity. Central banks in the west are competing with each other in the power of the money pump. Money is being printed by Fed, ECB and the Bank of Japan. Through asset purchase programmes known as QE, liquidity is actually pouring into the bond, equity, and in Japan even into the real estate markets.

According to economic textbooks, a drastic increase in the amount of money is accompanied by inflation. We are living in special times, now prices are not rising in retail outlets but in stock markets, Western investors are gobbling up stocks, and that is why we are seeing this insane rally in the west.

But why don’t they buy regional papers?

The stock market world is much more globalized that when American or Western European funds are rolling in money, none of it should be spent in Hungary, the Czech Republic, or Poland. It will probably happen, but at the moment the prevailing investor sentiment seems to be making better-known domestic markets much more attractive for investors.

Thus, Central and Eastern European shares are really underpriced, although there is no reason for one company to be trading at double price in London compared to another company in the same sector with the same growth prospects trading in Budapest.

The only problem is that while almost everyone is confident that the gap will close, it is hard to say whether prices are low in our region or high in the west.

What is a right level?

When the drastic economic downturn in the first half of the year (primarily in Q2) brought about the same horror in Hungary, the United States and Germany, is it realistic that

the US market is 20 percent higher than January 1, 2020,

the Hungarian is 20 percent lower,

while the German market is at exactly the same level?

No, it's surely irregular; it's an anomaly. The reason why we still need to be very careful with purchases is that, in the light of the effects of the coronavirus that change everything, the 20 percent plus seems to be a crazier reaction in the year of the COVID-19 outbreak than the 20 percent minus or even the zero effect.

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