Regional Equity Strategy

We are up 1.5% on our bullish Spanish small caps view since it was entered in our asset class strategy on January 9 (played through the IBEXS index), and see potential for further gains over the next few months, due to an attractive technical picture and the index's exposure to improving eurozone demand.

  • With valuations on Turkey's Borsa Istanbul equity index at multi-year lows, we see the potential for a short-term rally. However, we believe the trend will remain one of weakness over the coming months due to a confluence of macroeconomic and political risk in 2014.

  • Our eurozone over US stocks view (played via the ratio of MSCI US to MSCI EMU) has performed well in recent trading on the back of a more pronounced retracement in US markets. Although up only 2.4% since initiation in August last year, we believe the recovery in eurozone growth in H114 will help bring eurozone stock valuations towards US levels.

  • Potential For Bullish Break, Although Business Environment Concerns Linger
    Hungary - BUX Equity Index, Daily (LHS) and Monthly (RHS)
    • We are up 1.5% on our bullish Spanish small caps view since it was entered in our asset class strategy on January 9 (played through the IBEXS index), and see potential for further gains over the next few months, due to an attractive technical picture and the index's exposure to improving eurozone demand.

    • With valuations on Turkey's Borsa Istanbul equity index at multi-year lows, we see the potential for a short-term rally. However, we believe the trend will remain one of weakness over the coming months due to a confluence of macroeconomic and political risk in 2014.

    • Our eurozone over US stocks view (played via the ratio of MSCI US to MSCI EMU) has performed well in recent trading on the back of a more pronounced retracement in US markets. Although up only 2.4% since initiation in August last year, we believe the recovery in eurozone growth in H114 will help bring eurozone stock valuations towards US levels.

    • Despite Romania's benchmark BET index posting modest losses over the past week, against the backdrop of a regional downturn in stocks, we are up 6.5% on our bullish Romanian stocks view since it was placed in our asset class strategy on November 4 2013.

    • Hungary's BUX equity index looks attractive from a long-term technical perspective, however we reiterate that the poor operating environment could hinder substantial gains ( see below).

    Potential For Bullish Break, Although Business Environment Concerns Linger
    Hungary - BUX Equity Index, Daily (LHS) and Monthly (RHS)

    Hungarian equities have retraced somewhat following a bullish break ( see above left), but resistance-turned-support is holding and we believe the index will now head to 20,000. As we have outlined previously, drugmaker Gedeon Richter is well placed for a sustained rise, ( see 'Short-Term Gains For Equities Following Break Of Resistance', 13 January) which will spearhead the bourse's gains. In addition, Hungary's macro outlook continues to improve ( see 'Positive Consumer Outlook Bolsters Rate Hike Call', January 8), valuations remain relatively low, with the index as a whole trading at a discount to book value of equity of 0.94x, and market sentiment towards regional growth is set to stay positive. However, we retain our neutral-to-bearish view on the BUX index over the longer term, with OTP Bank likely to face difficulties as a result of an obstructive operating environment for banks. Nevertheless, a break of the 20,000 level would look bullish and indicate further gains ahead.

    BMI EUROPE ASSET CLASS STRATEGY
    DATE INITIATED ENTRY LEVEL GAIN/(LOSS) * RATIONALE
    CURRENCIES
    NA
    FIXED INCOME
    NA
    EQUITY INDICES
    Eurozone Over US Equities (Ratio of MSCI US to MSCI EMU) 15-Aug-2013 17.3 2.5% Though we still like the US, eurozone underperformance has reached extremes, and the eurozone economy is picking up momentum. The MSCI EMU looks attractive on a technical basis and is increasingly cheap versus the US. Targeting a move down in the US/EMU ratio to 14.0x.
    Bullish BET Index 04-Nov-2013 6,116.0 6.6% Romania's improving economic outlook, exposure to German domestic demand story, relative political stabiltity, strong technical picture and attractive valuations.
    Bullish Spanish Small Caps (IBEXS Index) 09-Jan-2014 5,050.0 1.6% Competitiveness gains for Spanish economy, large composition of exporters means index is preferred way to play improving eurozone domestic demand story, relatively cheap valuations, and attractive technical picture.
    MACRO/INDUSTRY STRATEGY
    NA
    Source: BMI, Bloomberg

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    This article is tagged to:
    Sector: Country Risk
    Geography: Europe, Austria, Czech Republic, Germany, Spain, Hungary, Italy, Poland, Romania, Russia, Turkey
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