East Europe Shares Rally 65% as Mobius Stays Bullish

2009/10/06

By Michael Patterson and Zijing Wu


Oct. 2 (Bloomberg) — Templeton Asset Management Ltd.’s Mark Mobius said he’s still buying Russia’s OAO Gazprom even after shares surged 64 percent this year because the stock remains relatively cheap.

The natural gas producer trades at about half the valuation of both Houston-based ConocoPhillips and EnCana Corp. of Calgary, Canada, and may climb 40 percent in the next 12 months, the average of analyst estimates compiled by Bloomberg shows.

Mobius, who oversees about $25 billion as Templeton’s executive chairman in Singapore, also is adding to holdings in Hungary, the Czech Republic and Poland. After rallying 28 percent in the third quarter to lead worldwide gains and 65 percent this year, the MSCI Eastern Europe Index trades at 1.2 times net assets, 40 percent less than the MSCI Emerging Markets Index’s 2 times, Bloomberg data show.

“I can’t remember ever being so positive on eastern Europe,” said Maarten-Jan Bakkum, an equity strategist at ING Groep NV’s money-management unit in The Hague who has analyzed emerging markets for 13 years. “Valuations still look quite good relative to other emerging markets,” said Bakkum, whose firm oversees about $400 billion worldwide.

Europe’s developing nations are poised to post the biggest swings in economic output among emerging-market regions next year, according to International Monetary Fund forecasts. Central and eastern European economies may expand 1.8 percent after contracting 5 percent in 2009, and Russia’s gross domestic product may rise 1.5 percent in 2010 after a 7.5 percent contraction this year, the Washington-based IMF estimates.

Profits in the region may climb 22 percent next year, according to the average of analysts’ projections compiled by Bloomberg.

Roubini, Moody’s

The eastern Europe index plunged a record 70 percent last year in the first global contraction since World War II. Everyone from New York University professor Nouriel Roubini to Moody’s Investors Service said the area may get worse in 2009. Roubini, who predicted the financial crisis, said in February that emerging Europe was a “recipe for disaster” and Moody’s forecast a “deep and long” recession.

Now stocks are beating benchmarks in western Europe, the U.S.,Latin America and Asia after international lenders provided more than $85 billion in aid, commodity prices rose and currencies from the zloty to the forint strengthened.

Cheap Shares

The outlook is improving as the eastern Europe gauge trades at 12.6 times its companies’ per-share earnings, compared with 20 times profit for the global emerging-market index, Bloomberg data show. The measure shows stocks in eastern Europe are cheaper than in Asia, where they trade at a combined 26 times earnings, and Latin America at 16 times profits. Eastern Europe’s price-to-book ratio of 1.2 is lower than Asia’s 2.1 and Latin America’s 2.2.

“Eastern Europe will outperform the global markets,” said Michael Ganske, the London-based head of emerging markets research at Commerzbank AG. “I’m still quite bullish.”

The gauge’s 117 percent rally from a nearly six-year low is “ahead of fundamentals” because many of the region’s economies are still contracting and any recovery will probably lag behind a global rebound, according to Christian Menegatti, the vice president of global economic research at New York-based RGE Monitor, Roubini’s research and advisory service.

The east Europe measure plunged 10 percent on Feb. 17 after Moody’s said some of Europe’s largest banks may be downgraded because of bad loans as the area’s economies entered a “deep and long economic downturn.” The index bottomed on March 2.

Downside Risks

“The downside risks to equities were there, and might be there now if it’s true, as we think it is, that there’s an over- valuation,” Menegatti said in a Sept. 30 interview. Roubini wasn’t available to comment, according to his spokesman Seth Linden.

Kristin Lindow, a senior vice president at Moody’s in New York, said in an interview on Sept. 29 that investors may have overreacted to the Feb. 17 report’s conclusions.

“I don’t think that was based on the paper itself, it just seemed to hit a chord,” Lindow said. Loan losses at east European banks have increased since the report and they keep climbing, Lindow said. Economies in some of Europe’s smallest developing countries may keep contracting through 2010, Lindow said. The Czech Republic and Poland are two of the most resilient countries in the region, she said.

IMF Bailouts

Eastern Europe’s stocks and currencies remain the most vulnerable to a selloff should the global economic recovery and demand for higher-yielding assets falter, said Tim Ash, head of Europe, Middle East and Africa research at Edinburgh-based Royal Bank of Scotland Group Plc, Britain’s biggest government- controlled bank.

The eastern Europe index dropped 2.3 percent as of 10:45 a.m. in London as commodity prices fell, the region’s currencies weakened and investors speculated a report will show the U.S. jobless rate climbed to a 26-year high in September. Russia’s Micex Index lost 2.5 percent.

Russia depends on global demand sustaining fuel prices, with about 30 percent of its output derived from oil and gas, according to the nation’s energy ministry.

Hungary and Ukraine required a combined $46 billion of bailout commitments from the IMF and other international lenders as the countries struggled to finance their current-account deficits, the broadest trade measure. Poland, facing what Finance Minister Jacek Rostowski called the zloty’s “uncontrolled depreciation,” obtained a $20.6 billion credit line from the IMF in May.

Baltics Surge

“The major risk is that the growth story disappoints,” Ash said in an interview. Eastern Europe’s rally is “largely” due to an improved outlook for the global economy, he said.

Baltic markets led stock indexes tracked by Bloomberg last quarter, with Lithuania’s OMX Vilnius Index jumping 72 percent. Estonia’s OMX Tallinn index added 49 percent, boosted by Stockholm-based phone company TeliaSonera AB’s Aug. 24 offer to buy out other shareholders of its Lithuanian and Estonian units.

Eastern Europe’s currencies are also rallying. Poland’s zloty climbed about 17 percent from an almost five-year low against the euro in February. Hungary’s forint advanced 18 percent from its weakest level in March. Russia’s ruble gained 21 percent from a February low versus the dollar.

The zloty may appreciate 15 percent versus the euro by the end of next year as the forint and Czech koruna strengthen, median forecasts in a Bloomberg analyst survey show.

Money Supply Boost

Stocks and currencies are bouncing back after the world’s richest countries pledged more than $1 trillion to help developing nations’ finances. Demand for higher-yielding assets helped governments in the region sell $23.7 billion of dollar- and euro-denominated bonds this year to repay existing debt and fund economic stimulus plans, up from $16.3 billion in the same period last year, Bloomberg data show.

“The improved global sentiment has increased risk appetite and helped the financing side,” said Claire Franklin, an equity analyst at London-based F&C Asset Management, which oversees about $136 billion. “We increased our holdings of stocks in the region” last quarter, she said.

A surge in money supply around the world spurred by historically low interest rates will keep cash flowing into emerging markets and boost equity prices, according to Mobius. Russian shares are “quite interesting” because of their relatively inexpensive valuations, he said in an interview this week.

The RTS index in Russia, the fourth largest of the so- called BRIC markets, trades at 1.1 times net assets after climbing 27 percent the past three months.

Goldman Call

India’s Bombay Stock Exchange Sensitive Index has a 3.6 price-to-book ratio, the highest among major emerging markets, after an 18 percent rally last quarter. The Shanghai Composite Index in China, the biggest emerging market, is valued at 3 times book value after declining 6.1 percent, according to Bloomberg data. Brazil’s Bovespa index has a price-to-book ratio of 2 after gaining 20 percent.

Goldman Sachs Group Inc., the New York-based bank that coined the BRIC moniker in 2001 to describe the four nations it projects will join the U.S. and Japan as the world’s largest economies by 2050, forecasts Russia’s RTS will gain another 34 percent in the next 12 months on “cheap” valuations and an economic recovery driven by rising commodities. Crude oil, Russia’s main export, has jumped 58 percent in New York trading since December, to about $70 a barrel.

‘Explosive’ Profits

Gazprom, Russia’s natural-gas export monopoly, trades at 6.4 times analysts’ average estimate for 2009 earnings, compared with 14.7 times for MSCI’s index of energy stocks worldwide, according to data compiled by Bloomberg. The shares may climb to 245.75 rubles in Moscow trading in the next 12 months from their closing price yesterday of 176.1 rubles, according to the average of analyst estimates compiled by Bloomberg.

ConocoPhillips, the second-biggest U.S. refiner, trades at 12.6 times analysts’ average estimate for 2009 earnings and EnCana, Canada’s largest natural-gas producer, is valued at 15 times.

UBS AG predicted an “explosive” rebound in Russian profits that will exceed analyst estimates by about 30 percent as companies cut costs and revenue rebounds.

“In Russia’s case the gearing to global recovery is at very high levels,” said John Lomax, the head of emerging-market strategy at HSBC Holdings Plc in London. “The market is outstandingly cheap,” said Lomax, whose bank is the world’s second-biggest by market value. He predicted Russia’s market will advance 20 percent by the end of this year.

Poland, Hungary

Poland’s WIG20 Index may climb 15 percent in the next six months, extending an 18 percent rally last quarter as the global economy fuels growth in the only eastern European Union member to escape a recession since the credit crisis began, said Wojciech Bialek, the chief analyst at the brokerage unit of Warsaw-based Bank Pekao SA, Poland’s biggest lender by market value.

KGHM Polska Miedz SA, Poland’s sole copper producer, trades at 7.5 times 2009 earnings estimates, compared with 24.3 times for MSCI’s index of global raw-materials shares.

The country’s gross domestic product will expand 0.8 percent in 2009 and 2 percent in 2010, according to median estimates of economists in a Bloomberg survey. The zloty will strengthen to 3.70 per euro by the end of 2010 from 4.26 yesterday, according to the median forecast from 25 banks and brokerages.

“Poland is the most attractive right now looking at the fundamentals,” said Mariusz Banasiak, who manages about $8 billion in emerging-market bonds and currencies at Prudential Investment Management in Newark, New Jersey. “If credit conditions loosen up and confidence grows more you will see more capital going into those markets,” said Banasiak, who predicts the zloty may gain 10 percent in the next year.

Czech Rally

Hungary’s BUX stock index, up 32 percent last quarter, may advance 10 percent more in the next five months as profits and the economy rebound, according to Zoltan Reczey, an analyst in Budapest at BudaCash Brokerhaz, the nation’s biggest stocks- derivatives trader. The forint will strengthen 2.3 percent by the end of next year, according to the median estimate of analysts surveyed by Bloomberg.

OTP Bank Nyrt., Hungary’s largest lender, is valued at 1.3 times net assets, compared with the 2.7 times average for emerging-market financial companies, according to Bloomberg data.

The Czech Republic’s PX Index gained 29 percent last quarter, while the koruna strengthened 3.1 percent against the euro. Prague-based utility operator CEZ AS will advance 8.3 percent in the next 12 months, according to the average of 19 analyst estimates compiled by Bloomberg.

Raiffeisen Centrobank AG, the securities unit of Austria’s third-biggest bank, upgraded CEZ to “buy” from “hold” last month, saying the electricity company is “well-positioned” to benefit from the region’s economic recovery.

To contact the reporter on this story: Michael Patterson in London at mpatterson10@ bloomberg. net.

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