2019 saw equity indices rally to all-time highs as global markets took stock of the improving event risk conditions. Notoriously, the Eurostoxx 50 Index serves as a European benchmark index that provides a measure of performance for the 50 largest Eurozone-based companies. The index is dominated by corporates that operate in developed markets having their market cap in excess of €10Bn. Its 2019 performance was 29.36% with the top three positive contributors being ASML with a performance of 95.28%, LVMH with a performance of 63.15% and Adidas with a performance of 60.99%. Meanwhile, the worst performing equities were Nokia OYJ losing 33%, Telefonica registering a negative return of 10.21% and Orange which lost 2.64%. Taking a historical look into the yearly index performance shows that this has been the best year for at least the last 20 years. There were only 3 negative months for 2019 with May 2019 registering the worst performance with a total net negative return of 5.53%. On the other hand, there were 5 months out of the 12 month period that registered a positive monthly return in excess of 4%.
A cursory look into equity market performance throughout Europe provides for surprising prospects to mainstream investors. Indeed, Europe saw Russia registering the best index performance with a total return of c. 56.50%. This was followed by Greece’s Athens Composite Index with a total return of c. 52.50% and Romania’s Bucharest Index that returned 46.90%. Comparatively, returns for these indices are much higher than the Eurostoxx 50 Index. What’s the reason for this?
Assuming that there are no endogenous factors dragging a country’s economic performance, emerging economies tend to have above average growth when compared to developed market peers. Inherently, emerging markets are exposed to greater risk given the development status which is a blessing in a benign global economic environment but a curse in periods of a global slowdown. In fact, on average, emerging economies tend to over perform developed economies as long as global growth is positive. This is underpinned by corporates shaping these economies that achieve supernormal profits in these types of environment. Moreover, as investors tolerate greater risk, this sentiment drives them to discount emerging economies with lower discount rates which drives up their value. The mainstay for the emerging space remains the perennial drawback of low liquidity that has a market impact upon either side of the trade. This makes it difficult for investors to realise gains at specific levels.
A fundamental look into Russia’s Index shows that return on equity (ROE) averaged around 15% and Romania’s index close to 14%. In comparison, the profitability per €1 of equity invested for Eurostoxx 50 companies currently stands at 9%. The higher ROE explains the higher growth environment within these countries. The Athens index still has a negative ROE. Oftentimes, investors pour money into an investment as their hopes rise of an economic recovery as in the case for Greece. Basic valuation metrics for Emerging European indices still show that current price to earnings ratio remain at relatively low levels for Russia and Romania with multiples at 6x and 8.7x respectively. The case for Greece is different as its multiple stands rather dearly at 33x. Clearly, market expectations are bullish for Greece; with a turnaround a must not a choice for it to sustain current market valuations.
This article was issued by Jesmar Halliday, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.
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