ccentral & eastern european strategyentral & eastern european … · 2018-05-02 ·...

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Central & Eastern European StrategyCentral & Eastern European Strategy4th quarter 2013

CEE not speared by EM

Indicators point to growth

FX slightly stronger, LCY yields sideways

Corporate Eurobonds offer less attractive valuations

Liquidity and seasonality positive on equities

2 4th quarter 2013

Content

Topical issue: Turbulent EM conditions have little impact on CEE 3

Forecasts CEE incl. Austria 4

Asset allocation CEE incl. Austria 6

Focus on: For the time being, CEE escapes EM market turmoil 10

Austria 12

CE: Poland 14

Hungary 16

Czech Republic 18

Slovakia 20

Slovenia 21

SEE: Croatia 22

Romania 24

Bulgaria 26

Serbia 27

Bosnia and Herzegovina 28

Albania 29

Kosovo 30

CIS: Belarus 31

Russia 32

Ukraine 34

Turkey 36

Sovereign Eurobonds 38

Corporate Eurobonds 40

Equity markets 42

Special Poland: Pension system changes negative for financial markets 48

Sectors 49

Equities - top picks 54

Equities - region overview 59

Sector weightings in comparison 63

Technical analysis 64

Quantitative analysis 66

Acknowledgements 67

Central & Eastern European Strategy

Explanation:e ... estimatef ... forecastp ... preliminary figures n.a. ... no value

AbbreviationsCurrencies and CountriesALL Albanian lekBAM Bosnian markaBGN Bulgarian levBYR Belarusian roubelCZK Czech korunaEKK Estonian kroonHUF Hungarian forintHRK Croatian kunaLTL Lithuanian litasLVL Latvian latsPLN Polish zlotyRON Romanian leuRSD Serbian dinarRUB Russian roubleSIT Slovenian tolarSKK Slovak korunaTRY Turkish liraUAH Ukrainian hryvnia

Economic abbreviations %-chg Percentage change (not in percentage points)avg averagebp basis pointsC/A Current AccountCPI Consumer Price IndexFCY Foreign CurrencyFDI Foreign Direct InvestmentsFX Foreign ExchangeFY Full yearGDP Gross Domestic ProductLCY Local Currencymmav month moving averagemom month on monthO/N overnight rate pp percentage pointsPPI Producer Price Indexqoq quarter on quarterT/B Trade BalanceULC Unit Labour Costsyoy year on yearytd year-to-date

Stock Exchange IndicesBELEX15 Serbian stock indexBET Romanian stock indexBUX Hungarian stock indexCROBEX10 Croatian stock indexPX Czech stock indexMICEX Russian stock indexSASX-10 Bosnian stock indexWIG 20 Polish stock index

Equity relatedDY Dividend yieldEG Earnings growthLTG Long term (earnings) growthP/B Price book ratioP/E Price earnings ratio

RS Recommendation suspendedUR Under Revision

Euro area Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovenia, Slovakia, Spain

CE Central European countries - Poland, Hungary, Czech Republic, Slovakia, Slovenia

SEE South East European countries - Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Kosovo, Romania, Serbia

CIS European CIS (Commonwealth of Independent States) countries - Russia, Ukraine, Belarus

CEE Central and Eastern Europe (CE + SEE + CIS)

34th quarter 2013

Topical issue

After a disappointing start to the year, the assessment of the economy started to im-prove in the subsequent months. Russia and Ukraine were the only countries where the spring data releases were quite subdued. As there were no signs of an upturn over the summer, we lowered our Russian GDP forecast for 2014 to +2%. Other-wise, we only modestly reduced the 2014 forecasts for Turkey, and with regard to all of the other GDP projections we see a solid basis for the anticipated improvement in sentiment in Europe and the CEE countries. In Austria, growth in H2 will have to accelerate considerably for our 2013 GDP forecast to be accurate. In 2014, GDP growth may reach 1.5%, returning to its potential output growth thanks to net exports and a pick-up in investments. All in all, in 2014 there will be a sharp reduction in the growth differences between the various regions in CEE. This convergent trend in GDP growth should also tend to characterise developments in 2015. The reason for this is the optimistic forecast for Germany, which should pave the way for increases in net exports in many of the open CEE economies. Domestic demand will probably only pick up with a certain lag, and as a result there will not be any significant change in current account balances. In terms of inflation, the low point has been reached for the most part. Starting from the second half of the year, one can gene-rally expect to see rising prices, leading to higher average inflation in 2014. Due to the price increases in 2013, Romania and Russia are in different positions.Impact on monetary policy and exchange ratesRegardless of the outflows of capital from the Emerging Markets, the rate-cutting trend has continued. Nonetheless, the development of domestic prices, currency weakness and the policies of the US central bank will set a lower limit to rate-cutting ambitions in most CEE countries. In Hungary and Romania, the central banks are still trying to exploit their remaining scope of action. This may, however, lead to tem-porary weakness for their currencies. Nevertheless, on the whole, we project modest appreciation trends for most CEE currencies versus the euro over the next 3-6 months. After weakening, the rouble should also stabilise temporarily versus USD. Still, over the medium term, we expect to see more depreciation for the Russian rouble. Impact on the bond and equity marketsYield increases in most CEE countries amounted to 50-100bp on 10-year maturi-ties and were thus significantly lower compared to the other Emerging Markets, because the fundamental conditions (capital/current account balance) were better. The outflows of capital only had a highly negative impact in Ukraine and Turkey. No easing can be expected to come from the overall global conditions, and thus long-term yields should remain at elevated levels until the first quarter. Accordingly, we take a positive view of LCY bonds for the next 3-6 months. A continuation of the upward trend in yields is only expected to occur later in 2014, in line with mo-vements in the developed bond markets. As for equities, we are optimistic about a positive end to the year, thanks to the extremely attractive valuations and the fact that these asset prices have lagged behind so far. The improvement in economic activity, however, should become clearly visible during the first half of 2014 and this will be reflected in further rises in equity indices.

Peter Brezinschek

Turbulent EM conditions have little impact on CEE

Recommendations1 – debt markets

LCY bonds3

Buy PLN 3y T-bondsTRY T-bonds (speculative)

Eurobonds

Buy Turkey 6.875% 03/2036 USDSerbia 6.75% 11/2024 USD

Corporate bonds

BuyVnesheconombank 5.375% due 2017Gazprom 4.95% due 2022

1 horizon: end 4th quarter 20132 the indicated price is the last price as available at 6.30 a.m. (CET) on 17 September 20133 unhedged (performance in EUR)Source: Raiffeisen RESEARCH

Recommendations1 - stock markets

Indices

BuyMICEX, BUX, WIG20, PX, MICEX, BET, CROBEX10

Sectors

Overweight Basic materials, oil & gas

Underweight TelecommunicationEquities

Buy

KGHMPLN 123.802

Target price: PLN 150KrkaEUR 50.002

Target price: EUR 62.00OMVEUR 36.302

Target price: EUR 42.40Oesterreichische PostEUR 32.622

Target price: EUR 37.00PhosAgroUSD 9.822

Target price: USD 18.20

PMI in CE show upward trend

Source: Markit, Thomson Reuters, Raiffeisen RESEARCH

44

48

52

56

Oct-12 Jan-13 Apr-13 Jul-13

Czech Rep. PolandRussia Austria

Sell-off in parts of Asia and Latin America has no spillover effects Corporate sentiment improving in major CEE countries as well, as the economic recovery begins to take root Low point in interest rates has essentially been reached, rises in yields to follow trends in the developed markets

4 4th quarter 2013

Consumer prices (avg, % yoy)

Countries 2012 2013 2014e 2015fPoland 3.7 1.2 2.0 2.5Hungary 5.7 2.0 2.5 3.0Czech Rep. 3.3 1.5 1.2 2.2Slovakia 3.6 1.6 1.7 2.7Slovenia 2.6 2.0 2.0 2.0CE 3.8 1.4 1.9 2.5Croatia 3.4 2.5 2.7 2.9Bulgaria 3.0 2.0 3.4 3.5Romania 3.3 4.2 2.2 3.0Serbia 7.8 9.5 9.0 5.5Bosnia a. H. 2.1 1.0 2.5 2.5Albania 2.0 2.5 2.8 3.0Kosovo 2.5 2.4 1.5 2.5SEE 3.7 3.9 3.2 3.3Russia 5.1 6.7 5.5 5.4Ukraine 0.6 -0.2 5.0 7.5Belarus 59.2 19.0 21.5 20.0CIS 6.3 6.5 5.9 6.0CEE 5.4 4.9 4.6 4.8Turkey 9.0 6.0 6.7 6.0Austria 2.6 1.9 2.1 2.3Germany 2.1 1.5 1.5 2.0Euro area 2.5 1.5 1.6 1.8

Source: Thomson Reuters, Raiffeisen RESEARCH

Current account balance (% of GDP)

Countries 2012 2013 2014e 2015fPoland -3.5 -2.6 -4.0 -4.0Hungary 1.9 2.6 2.8 2.5Czech Rep. -2.5 -1.0 -0.8 -0.5Slovakia 2.3 3.1 3.0 3.1Slovenia 3.2 3.6 3.2 2.1CE -1.7 -0.7 -1.5 -1.6Croatia 0.0 -0.7 -0.9 -0.6Bulgaria -0.7 1.0 0.5 -0.8Romania -3.8 -1.0 -2.0 -2.5Serbia -10.5 -5.9 -7.7 -8.6Bosnia a. H. -9.7 -8.6 -9.8 -10.2Albania -8.8 -9.1 -9.2 -9.2Kosovo -20.4 -20.9 -18.9 -18.4SEE -4.3 -2.3 -3.1 -3.6Russia 3.7 2.8 2.0 1.1Ukraine -8.5 -6.6 -6.5 -5.9Belarus -2.9 -10.0 -3.5 -6.0CIS 2.6 1.7 1.2 0.3CEE 0.8 0.7 0.0 -0.6Turkey -6.1 -6.7 -6.6 -6.0Austria 1.8 2.2 2.2 1.7Germany 7.0 7.0 7.0 6.5Euro area 1.3 1.8 1.9 1.5


Forecasts

General budget balance (% of GDP)

Countries 2012 2013 2014e 2015fPoland -3.9 -4.1 -3.8 -3.4Hungary -1.9 -2.9 -2.9 -2.9Czech Rep. -4.4 -2.9 -2.9 -2.9Slovakia -4.3 -3.1 -2.9 -2.6Slovenia -4.0 -8.0 -3.5 -3.0CE -3.8 -3.8 -3.4 -3.1Croatia -4.1 -4.5 -3.6 -3.2Bulgaria -0.5 -2.1 -1.8 -1.3Romania -2.9 -2.8 -2.5 -2.3Serbia -5.7 -5.0 -4.5 -4.0Bosnia a. H. -2.0 -1.5 -1.0 -1.0Albania -3.4 -3.4 -3.4 -3.4Kosovo -2.7 -3.5 -2.5 -2.0SEE -3.0 -3.2 -2.7 -2.5Russia 0.4 -0.5 -0.2 -0.6Ukraine -5.5 -4.0 -5.0 -3.5Belarus 0.5 0.0 0.0 0.0CIS 0.0 -0.8 -0.6 -0.8CEE -1.3 -1.8 -1.5 -1.6Turkey -2.4 -2.2 -2.5 -2.2Austria -2.5 -2.9 -2.0 -1.0Germany 0.2 -0.2 0.0 0.5Euro area -3.7 -2.9 -2.8 -2.3


Public debt (% of GDP)

Countries 2012 2013 2014e 2015fPoland 55.6 57.1 57.6 57.2Hungary 79.2 78.7 77.2 77.1Czech Rep. 45.9 48.4 49.6 50.6Slovakia 52.2 54.7 56.9 56.5Slovenia 54.0 65.0 67.0 68.0CE 56.3 58.3 58.9 58.9Croatia 53.7 61.8 65.4 67.0Bulgaria 18.3 17.8 19.4 16.1Romania 37.8 38.5 38.9 38.9Serbia 59.7 59.3 59.9 58.5Bosnia a. H. 39.7 41.5 39.6 38.5Albania 61.5 62.6 62.0 62.0Kosovo 18.0 20.0 22.0 22.0SEE 40.6 42.2 43.2 42.8Russia 10.5 11.0 11.5 12.5Ukraine 36.8 37.5 39.0 40.0Belarus 31.5 31.3 32.6 33.4CIS 13.1 13.6 14.2 15.2CEE 27.4 28.4 29.0 29.6Turkey 36.8 35.0 33.0 32.0Austria 74.1 75.2 75.3 73.7Germany 81.9 81.1 78.6 76.0Euro area 90.6 93.5 94.0 93.0


Gross foreign debt (% of GDP)

Countries 2012 2013 2014e 2015fPoland 72.4 73.1 70.9 69.0Hungary 126.8 119.2 110.3 99.5Czech Rep. 50.7 51.5 50.5 49.9Slovakia 71.2 72.8 75.4 76.6Slovenia 111.9 114.3 112.9 110.4CE 76.9 76.8 74.2 71.6Croatia 102.3 103.1 99.8 97.0Bulgaria 94.8 91.4 89.2 82.3Romania 75.2 70.9 69.6 68.0Serbia 85.9 81.2 79.5 75.9Bosnia a. H. 63.1 62.7 62.0 60.3Albania 24.7 24.5 26.8 27.6Kosovo 17.2 17.3 16.5 15.6SEE 80.1 76.9 75.3 72.6Russia 30.9 33.7 34.0 34.0Ukraine 76.3 77.3 76.5 79.1Belarus 52.0 51.9 52.5 52.9CIS 34.8 37.6 37.8 38.0CEE 50.5 51.9 51.2 50.5Turkey 45.2 46.3 49.5 46.3Austria n.a. n.a. n.a. n.a.Germany n.a. n.a. n.a. n.a.Euro area n.a. n.a. n.a. n.a.


Exchange rate EUR/LCY (avg)

Countries 2012 2013 2014e 2015fPoland 4.19 4.17 4.04 3.93Hungary 289.2 297.5 303.8 300.0Czech Rep. 25.1 25.7 25.1 24.6Slovakia euro euro euro euroSlovenia euro euro euro euro

Croatia 7.52 7.55 7.50 7.50Bulgaria 1.96 1.96 1.96 1.96Romania 4.46 4.43 4.48 4.45Serbia 113.0 113.2 113.8 114.4Bosnia a. H. 1.96 1.96 1.96 1.96Albania 139.0 139.7 138.3 138.0Kosovo euro euro euro euro

Russia 40.0 42.0 43.0 44.1Ukraine 10.39 10.67 10.92 11.96Belarus 10700 12100 14300 16100

Turkey 2.31 2.58 2.73 2.60Austria euro euro euro euroGermany euro euro euro euroUSA 1.29 1.31 1.30 1.30


Ratings1

Countries S&P Moody's FitchPoland A- A2 A-Hungary BB Ba1 BB+Czech Rep. AA- A1 A+Slovakia A A2 A+Slovenia A- Ba1 BBB+

Croatia BB+ Ba1 BB+Bulgaria BBB Baa2 BBB-Romania BB+ Baa3 BBB-Serbia BB- B1 BB-Bosnia a. H. B B3 not ratedAlbania B+ B1 not ratedKosovo not rated not rated not rated

Russia BBB Baa1 BBBUkraine B Caa1 BBelarus B- B3 not rated

Turkey BB+ Baa3 BBB-Austria AA+ Aaa AAAGermany AAA Aaa AAA1 for FCY, long-term debtSource: Bloomberg, Raiffeisen RESEARCH

Real GDP (% yoy)

Countries 2013 Consensus 2014e Consensus 2015f ConsensusPoland 1.2 1.1 2.5 2.6 3.0 3.4Hungary 0.5 0.5 1.5 1.4 1.5 2.1Czech Rep. -1.0 -1.0 1.9 1.8 2.4 2.6Slovakia 0.9 0.9 2.0 2.1 3.0 3.1Slovenia -2.0 -2.4 0.0 0.0 1.5 1.1CE 0.5 0.4 2.1 2.1 2.6 2.9Croatia -0.5 -0.7 1.0 0.8 1.5 1.9Bulgaria 0.5 0.8 2.0 1.8 3.5 2.8Romania 2.5 2.3 2.0 2.5 2.5 3.1Serbia 1.5 1.5 2.0 2.4 3.0 0.0Bosnia a. H. 0.5 0.6 1.5 1.9 3.5 0.0Albania 2.0 2.2 3.0 2.8 3.5 0.0Kosovo 3.0 n.a. 3.0 n.a. 4.0 n.a.SEE 1.5 1.4 1.9 2.1 2.7 2.2Russia 2.0 2.0 2.0 2.6 2.5 3.1Ukraine 1.0 -0.1 1.5 2.1 2.5 3.2Belarus 2.0 1.9 2.0 2.8 3.0 0.0CIS 1.9 1.8 2.0 2.6 2.5 3.0CEE 1.5 1.4 2.0 2.4 2.6 2.9Turkey 3.5 3.5 3.5 3.9 5.0 4.9Austria 0.5 0.4 1.5 1.5 2.3 1.9Germany 0.5 0.5 1.8 1.7 2.5 1.9Euro area -0.3 -0.4 1.5 0.9 2.0 1.4

Source: Thomson Reuters, Consensus Economics, Raiffeisen RESEARCH

54th quarter 2013

Exchange rate forecast

Countries 17-Sep1 Dec-13 Mar-14 Sep-14vs EURPoland 4.21 4.15 4.10 4.05Hungary 297.11 300.0 305.0 305.0Czech R. 25.73 25.5 25.4 24.9Croatia 7.61 7.60 7.57 7.52Romania 4.48 4.50 4.45 4.50Serbia 114.72 115.0 113.0 114.0Albania 140.42 140.0 139.5 139.0

vs USDRussia 32.2 33.0 32.5 33.3Ukraine 8.19 8.20 8.20 8.40Belarus 9030 9800 10300 11400Turkey 2.00 1.95 2.00 2.05

EUR/USD 1.34 1.30 1.31 1.281 5:00 p.m. (CET)Source: Bloomberg, Raiffeisen RESEARCH

2y LCY yield forecast

Countries 17-Sep1 Dec-13 Mar-14 Sep-14Poland 3.01 3.23 3.38 3.63Hungary 4.14 4.45 4.90 5.00Czech R. 0.21 0.30 0.40 0.80Croatia 3.15 3.50 3.50 3.70Romania 4.43 3.95 3.85 3.90Russia 6.20 6.20 6.00 6.00Turkey 8.63 8.80 9.30 9.00

Austria 0.25 0.35 0.45 0.85Germany 0.21 0.30 0.40 0.80USA 0.37 0.50 0.50 1.00

1 5:00 p.m. (CET)Source: Bloomberg, Raiffeisen RESEARCH

Key interest rate forecast

Countries 17-Sep1 Dec-13 Mar-14 Sep-14Poland 2.50 2.50 2.50 2.75Hungary 3.802 3.50 3.20 3.20Czech R. 0.05 0.05 0.05 0.05Romania 4.50 3.75 3.50 3.50Russia 5.50 5.25 5.25 5.25Turkey 4.50 4.50 5.00 5.50

Euro area 0.50 0.50 0.50 0.50USA 0.25 0.25 0.25 0.251 5:00 p.m. (CET)2 20bp cut to 3.60% on 23 September 2013Source: Bloomberg, Raiffeisen RESEARCH

Forecasts

3m money market rate forecast


Euro area 0.22 0.25 0.30 0.50USA 0.25 0.30 0.30 0.301 5:00 p.m. (CET)Source: Bloomberg, Raiffeisen RESEARCH









Yield structure

Bp-spread between 10y and 3m maturitySource: Bloomberg, Raiffeisen RESEARCH

0

50

100

150

200

250

300

Pola

nd

Hun

gary

Cze

ch R

ep.

Rom

ania

Ger

man

y

USA

LCY changes vs. EUR (% qoq)1

1 17-Sep 2013 in comparison to 1 July 2013Source: Bloomberg

PLN

CZK

RUB

RON

HUF

USD

TRY

-8 -6 -4 -2 0 2 4

Expected yield change

Bp-change of gov. bond yield in next 3 monthsSource: Bloomberg, Raiffeisen RESEARCH

-100

10203040506070

Pola

nd

Hun

gary

Cze

ch R

ep.

Rom

ania

Ger

man

y

USA

Expected index performance

Source: Raiffeisen RESEARCH

0%2%4%6%8%

10%12%14%16%

ATX

WIG

20

BUX PX

MIC

EX BET

CRO

BEX1

0

BIST

Nat

. 100

Dec-13 Mar-14

Stock market indicators

Earnings growth

Price/ear-nings ratio

13e 14f 13e 14f

ATX 24.0% 11.6% 12.2 11.0WIG 20 -22.5% 2.6% 13.2 12.8BUX -5.3% 11.9% 9.9 8.9PX1 -10.9% 16.8% 13.4 11.5MICEX -1.3% 3.5% 5.6 5.4BET 20.3% 12.0% 7.5 6.7CROBEX10 25.6% 5.9% 10.6 10.0BIST Nat. 100

1.1% 7.6% 10.6 9.9

1 Czech Rep. (PX): excl. Orco PropertySource: Thomson Reuters, IBES, Bloomberg, Raiffeisen RESEARCH

Stock market forecasts

Index estimates

17-Sep1 Dec-13 Mar-14 Sep-14

ATX 2,499 2,630 2,750 2,720WIG 20 2,365 2,490 2,570 2,520BUX 18,629 19,600 20,500 20,000PX 978 1,030 1,070 1,070MICEX 1,473 1,550 1,620 1,600BET 5,825 6,400 6,800 6,800CROBEX10 1,029 1,080 1,130 1,130BIST Nat. 100

74,783 81,000 86,000 86,000

1 11:59 p.m. (CET)In local currencySource: Bloomberg, Raiffeisen RESEARCH

6 4th quarter 2013

Asset allocation - performance

Sum of last quarter1

RBI portfolio (in EUR) 5.69%Benchmark (in EUR) 5.69%RBI outperformance (in EUR) 0.00%by weighting of equities vs. bonds 0.00%

regional equity weightings 0.00%weighting of EB vs. LCY bonds 0.00%country weightings of LCY bonds 0.00%country weightings of EB EUR 0.00%country weightings of EB USD 0.00%joint effects / duration 0.00%

1 20 Jun 2013 - 17 Sep 2013EB...EurobondsSource: Thomson Reuters, Raiffeisen RESEARCH

Modest rebound over the summer

Period 1: 20 Jun 2013 – 30 Jul 2013

RBI portfolio (in EUR) 3.06%Benchmark (in EUR) 3.04%RBI outperformance (in EUR) 0.02%by weighting of equities vs. bonds 0.00%

regional equity weightings -0.01%weighting of EB vs. LCY bonds 0.00%country weightings of LCY bonds 0.03%country weightings of EB EUR 0.00%country weightings of EB USD 0.00%joint effects / duration 0.00%

EB...Eurobonds Source: Thomson Reuters, Raiffeisen RESEARCH

Period 2: 30 Jul 2013 – 27 Aug 2013

RBI portfolio (in EUR) -0.69%Benchmark (in EUR) -0.75%RBI outperformance (in EUR) 0.06%by weighting of equities vs. bonds 0.00%

regional equity weightings 0.07%weighting of EB vs. LCY bonds 0.00%country weightings of LCY bonds -0.01%country weightings of EB EUR 0.00%country weightings of EB USD 0.00%joint effects / duration 0.00%


Period 3: 27 Aug 2013 – 17 Sep 2013

RBI portfolio (in EUR) 3.33%Benchmark (in EUR) 3.40%RBI outperformance (in EUR) -0.08%by weighting of equities vs. bonds 0.00%

regional equity weightings -0.06%weighting of EB vs. LCY bonds 0.00%country weightings of LCY bonds -0.02%country weightings of EB EUR 0.00%country weightings of EB USD 0.00%joint effects / duration 0.00%


-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

90

92

94

96

98

100

102

Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13

in p

erce

ntag

e po

ints

RBI-Portfolio Outperformance (r.h.s.)

Performance 2013


Good performance by the portfolio in Q3 2013 Relatively positive performance by the Polish and Romanian equity markets Ups and downs in the LCY bond segment

After the tough market conditions in the first half of the year, the environment remained challenging in the third quarter. We were able to bridge over this period with a flat performance compared to the benchmark, which was reflected by our neutral weighting of equities versus bonds for the entire period. The mild underperformance of 7bp from the first half of the year was not improved in spite of shifting the emphases within the equity portfolio and remained constant. In the equity segment, Romania (entire quarter) and Poland (first two periods only) were overweighted. This resulted in a sideways movement relative to the benchmark over the whole period. Amongst other things, for all of the periods this was financed with an underweight position on Russia, whereby the cyclically-induced selling pressure prompted us to increase the underweighting for the second period, leading to outperformance of around 2bp. By contrast, under-performance of almost 3bp was recorded in the third period, as the short-term increase in the price of oil (Syria) supported the Russian market. The Czech Republic was underweighted during the first investment period, which resulted in outperformance of almost 1bp. Within the LCY bond segment, an underweighting of Russia during the first investment period resulted in a sideways trend, whereas the overweighting of Romania in the following periods generated mild underperformance of 1bp. The financing of these positions with Hungarian bonds also resulted in modest underperformance during this period. Continuing the successful strategy from the previous quarter, financing from low-yielding Czech bonds was maintained in all the periods in the LCY bond segment, generating outperformance of around almost 3bp on the whole. Polish bonds were also overweighted over the entire period, in part due to the stronger currency, resulting in a small outperformance of around 1bp.

Stefan Theußl

74th quarter 2013

Asset allocation - total portfolio

The economic situation in CEE is gradually improving again and the hopes are being followed by mounting optimism that some countries will return to higher growth rates. The projection for a recovery in the euro area should also help pave the way for positive trends in the CEE equity markets. First and foremost, it will be the stock markets in the EU countries Romania and Poland that will be able to take advantage of the growth impulses emanating from the euro area. Generally speaking, entry levels in the CEE region are looking very attractive and there is consequently good potential for returns. One must note, however, that the main topics will continue to be the economic recovery in the euro area on the one hand, and the developments on the commodity markets (in particular oil) on the other. Furthermore, political uncertainties deserve to be highlighted in certain countries (Czech Republic, Hungary) and these could lead to a setback or two. Volatility will also remain high.In terms of currencies, over the medium term there should not be any major moves in the CEE region. Yields on 10-year government bonds will rise modestly or stagnate at interesting levels. At the same time, the leeway for further rate cuts is growing ever smaller and thus more significant price gains for bonds are looking less likely.Accordingly, the quite attractive potential returns offered by the CEE equity mar-kets will be able to entice more investors again. Although the mood is over-shadowed somewhat by the high volatility in these markets, in the event of a durable recovery in the established markets we believe that equities will enjoy a performance advantage over bonds over the medium term. With this in mind, we recommend an overweight of 5pp in the equity segment. Within the bond portfolio, we stick with the neutral position on LCY bonds versus Eurobonds in the current environment.

Stefan Theußl

Hopes followed by optimism

Historical volatility & performance (%)

Equities1 BondsVolatility Performance Volatility Performance

Countries EUR LCY EUR LCY EUR LCY EUR LCY

Czech Republic 19.2 18.5 -13.7 -11.6 5.0 3.6 -3.2 -0.8

Hungary 28.7 25.9 -3.1 -0.8 9.6 4.9 3.4 5.9

Poland 23.8 21.4 -8.2 -5.3 9.8 4.9 -3.2 -0.1

Romania 14.0 13.3 13.0 13.8 4.5 0.8 2.2 2.9

Russia 19.2 17.5 -2.4 3.2 8.5 4.0 -3.3 3.2

Turkey 38.6 30.4 -15.9 -4.3 19.0 9.9 -15.7 -4.1

Croatia 9.8 9.2 -5.3 -4.5 3.6 3.6 1.7 1.7

CEE 12.7 - -4.9 - 6.2 - -2.2 -1 MSCI indicesVolatility in EUR; 3 months volatility annualised; ytd performance in EURLCY…local currencySource: Thomson Reuters, Raiffeisen RESEARCH

CEE portfolio weightings Q4 2013

LCY…local currency[-] , [+] = Over-/underweight versus benchmark[0] = no changeSource: Raiffeisen RESEARCH

Risk-return (%)

In local currencySource: Thomson Reuters, Raiffeisen RESEARCH

Economic improvement in the euro area strengthens the CEE markets Less and less leeway available for more rate cuts Benign conditions for equities

Equities: 55%[+5 pp]

LCY-bonds: 36% [-4 pp]

EB USD: 4.5% [-0.5 pp]

EB EUR: 4.5% [-0.5 pp]

RTS-Index

WIG 20

CTX

HTXCROBE

X

Dow Jones

Euro STOXX

50

CEEBET 10

-8

-4

0

4

8

12

16

10 15 20 25

His

toric

3 m

onth

per

form

ance

in

%

Historic 1y volatility in %

8 4th quarter 2013

Asset allocation – bonds

Good prospects for returns with moderate risk

Expected bond market performance (%)

3m 6m 9m 12m


Czech Republic -0.8 -1.7 -1.6 -2.9 -2.4 -4.8 -1.8 -4.9

Hungary -3.5 -2.6 -6.2 -3.7 -0.4 0.5 -3.0 -0.5

Poland 1.7 0.1 3.6 0.7 6.7 1.2 5.6 1.4

Romania 2.6 3.1 5.0 4.3 4.2 4.7 4.6 5.1

Russia 6.4 6.2 11.3 10.0 9.6 9.0 13.4 12.4

Turkey 9.1 3.4 3.3 1.3 -0.3 1.0 6.3 4.3

Croatia 1.5 1.3 2.3 1.8 5.0 3.2 5.8 4.6 Not annualised; 10y treasury bond, LCY…local currencySource: Raiffeisen RESEARCH

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

Cze

ch R

ep.

Hun

gary

Pola

nd

Rom

ania

Russ

ia

Turk

ey

Cro

atia

EUR Local currency

Historical relative performance*

* since 3 months, local currency bonds versus portfolio bond benchmarkSource: Thomson Reuters, Raiffeisen RESEARCH

Risk of sharp declines limited Outlook for more rate cuts in Romania Low potential return for Czech bonds

Portfolio weightings: bonds*

Portfolio Benchmark Difference

EB USD 10.0% 10.0% 0.0%

EB EUR 10.0% 10.0% 0.0%

LCY 80.0% 80.0% 0.0%

Czech Republic 17.0% 20.0% -3.0%

Hungary 20.0% 20.0% 0.0%

Poland 46.5% 45.0% 1.5%

Romania 6.5% 5.0% 1.5%

Russia 5.0% 5.0% 0.0%

Turkey 5.0% 5.0% 0.0%

Croatia 0.0% 0.0% 0.0%* share in percentage pointsSource: Raiffeisen RESEARCH

The announcement by the Fed that it intended to let its bond purchase programme run out resulted in steep de-clines in prices of so-called ‘safe haven’ assets such as German and US government bonds. Markets in CEE were unable to avoid the impact of this downward trend, but we expect that this overreaction will eventually come to an end. Ultimately, the Fed’s monetary policy measures should already be priced in, and thus the downside risk from this factor should be relatively limited. While the low inflation rates in the Czech Republic would support an-other rate cut, this move appears rather unlikely against the backdrop of improving economic indicators. Further-more, due to their strong correlation with German yields, yields on Czech assets are likely to follow the medium-term upward trend anticipated for Bunds. Prices of Ro-manian bonds have held up somewhat better in recent weeks, mostly due to the ongoing rate-cutting cycle. With this in mind, we expect a further reduction of 50bp in the key rate in Romania. This, in turn, should facilitate higher prices on the bond market. No further rate cuts will occur in Poland, but we still see the relatively high yields on Pol-ish bonds as a good investment opportunity. In view of this, within the bond segment we weight both Poland and Romania at +1.5%, financing this with a corresponding underweight on Czech bonds. We opt not to enter into any other attractive carry bets due to the recently strong volatility in EM exchange rates. Thus, the weighting of the other positions is identical to the benchmark.

Stefan Memmer

94th quarter 2013

Asset allocation – equities

Performance boost thanks to improving economic conditions

CEE stock markets have catch-up potential Falling oil price hinders performance of Russian shares Romanian stocks: conditions suggest even more outperformance

Expected stock market performance (%)

3m 6m 9m 12m


Poland 7.0 5.3 11.8 8.7 9.9 10.8 7.0 6.6

Hungary 4.2 5.2 7.2 10.0 9.8 12.7 8.2 7.4

Czech Republic 6.3 5.3 10.8 9.4 12.5 12.5 9.6 9.4

Russia 5.4 5.2 11.2 10.0 12.2 12.0 8.8 8.6

Romania 9.4 9.9 17.5 16.7 17.9 18.5 17.5 16.7

Croatia 5.1 5.0 10.4 9.8 11.9 11.8 10.4 9.8Not annualised, LCY…local currencySource: Raiffeisen RESEARCH

-20%

-15%

-10%

-5%

0%

5%

Russ

ia

Cze

ch R

epub

lic

Rom

ania

Pola

nd

Cro

atia

Hun

gary

EUR Local currency

Historical relative performance*

* to MSCI CEE, since 3 monthsSource: Thomson Reuters, Raiffeisen RESEARCH

Despite the uncertainty about the Fed’s monetary policy measures, the Eastern European stock indices held their ground and were even able to partially outperform the US markets. On the one hand, this seems to suggest that this region is gradually breaking away from the international factors, and on the other it reflects the fact that CEE is also profiting from the economic improvement in the euro area. Due to the high weighting of gas and oil compa-nies, Russia’s leading stock index exhibits a high degree of correlation with the price of oil. As it now looks like there will be no military intervention in Syria by the West, we expect the price of oil to decline, resulting in weak performance for Russian stocks over the medium term. Fur-thermore, looking back at recent years the Russian market shows a relatively poor risk-return profile. By contrast, in Romania another rate cut by the central bank should give companies the boost needed to continue their very good performance since the beginning of the year. With this in mind, we project an increase in real growth and in corpo-rate earnings in Romania. In reflection of this, we weight the Romanian market at +2%, financing this with a -2% underweighting on Russia.Although Hungarian shares should be boosted by the mon-etary policy measures, we see political risk in particular as a negative factor for this market. Accordingly, despite the relatively attractive valuations of Hungarian stocks we opt for no weighting in this market. The remaining regions are weighted neutral compared to the benchmark.

Stefan Memmer

Portfolio weightings: stocks

Portfolio Benchmark Difference

Czech Republic 15.0% 15.0% 0.0%

Hungary 12.0% 12.0% 0.0%

Poland 25.0% 25.0% 0.0%

Russia 38.0% 40.0% -2.0%

Croatia 3.0% 3.0% 0.0%

Romania 7.0% 5.0% 2.0%Source: Raiffeisen RESEARCH

10 4th quarter 2013

Focus on

While currencies and bonds in the Emerging Markets (EM) have returned to some stability recently, previous months were rocky. Hints about a reduction in the Fed’s bond buying programme in late May triggered major disruptions on EM markets. Since May, currencies such as the Indonesian rupee, the Brazilian real, the South African rand and the Turkish lira have lost 10-15% of their value. CEE has not been at the centre of these developments. Even CEE countries with chal-lenging fundamentals such as Hungary were not hit hard. Instead, Emerging Asia and LatAm countries suffered much more – the most recent tapering postponement just buys EM some more time.

At first sight, the relative CEE outperformance looks surprising. Several metrics of vulnerability (e.g. external debt levels or external financing needs) are worse in CEE than in other EM regions. CEE public debt levels are also higher than in many other EM. The better metrics of non-CEE EMs can be explained by the les-sons learned from the 1998 Asian Crisis. Many EM countries have reduced their external indebtedness since then and bolstered their FX reserves. This has not been the case in many CEE countries, which borrowed strongly in the 2000s until the Lehman Shock. Moreover, foreign investor presence on CEE bond markets is comparably high, amounting to around 40% (unweighted average), versus 25% in selected non-European EM countries. Taking this into account, a change in for-eign investors’ behaviour should have a larger impact on CEE. However, this time around there were many good reasons why CEE stood on the sidelines. Firstly, many CEE countries already went through an economic crisis and prolonged eco-nomic adjustment in the years after the 2008 Lehman shock. Large external im-balances such as current account (C/A) deficits were then deemed unsustainable by investors, who exited these countries. During the deep recessions, the CEE countries adjusted their C/As, which are generally much lower than five years ago, and consolidated their public finances. Some CEE countries are now actually posting C/A surpluses. By contrast, other EMs have seen some signs of reform fatigue and rising C/A deficits in recent years. Even after the pressure on CEE was over, investors remained cautious about CEE in recent years. This can be seen in the capital flows to the region, which remained fairly subdued in recent years compared to global EM. Investors shunned the slowly recovering CEE economies, but preferred the (at that time) still unscathed EM world outside CEE. For example, volatile cross-border claims of banks towards EMs (including CEE) rose by 30% from 2008 until Q1 2013, while banks’ exposure towards CEE (ex. Russia) actu-ally declined slightly. The biggest cross-border exposure booms were seen in the Asia/Pacific region and Latam (with increases at 80% in Asia/Pacific). Finally, the rule of thumb that the next larger regional EM crisis usually does not take place in the region of the last crisis has proven right once again.

Given the recent performance, it looks like CEE has received less highly specula-tive Fed-induced inflows, but more diversification flows over the last few years, i.e. flows from European or global investors that diversified their portfolios away

For the time being, CEE escapes EM market turmoil

External debt (% of GDP)

FX performance to EUR since May 13*

Source: JEDH, IMF WEO, Raiffeisen RESEARCH

*Maximum depreciation in percent in period between 1-May and 17-Sep 2013Source: Thomson Reuters, Raiffeisen RESEARCH

CDS market, spread in bp*

* 5-year USD CDS, CEE Select - simple average CDS spread of PL, HU, CZ, SK, SI, BG, HR, RO, RSSource: Bloomberg, Raiffeisen RESEARCH

0

50

100

150

HU

UA

RO PL CZ TR ZA RU IN BR

Government Central bankBanks Other sectorsIntercompany

-25

-20

-15

-10

-5

0

INR

BRL

ZAR

TRY

RUB

BYR

RON

PLN

HU

FU

AH

CZK

50

100

150

200

250

300

350

Sep-12 Dec-12 Mar-13 Jun-13 Sep-13

CEE Select * RUTR ZABR

Despite worse debt metrics, CEE has not been at the centre of the recent EM sell-off CEE already went through a crisis and prolonged economic adjustment since 2008/2009 Investors have remained cautious on CEE in recent years Recent outperformance of CEE vs. global EMs may not hold over the next 6-12 months

114th quarter 2013

Special

Change in cross-border claims*

* 2008 until Q1 2013, all BIS-reporting banksSource: BIS, Raiffeisen RESEARCH

from the Euro area periphery (and were in some cases still looking for EU/OECD member countries in Europe, but now in CEE). Fairly sizeable capital inflows to global EMs (ex. CEE) and lax financing conditions also supported strong financial sector expansion in some EM countries. This can be seen in strong increases in the loan-to-GDP ratios in global EMs over the last 3-4 years. Given the banking boom in CEE during the pre-crisis period (i.e. before 2008), it comes as no sur-prise that over the last 3-4 years there was nothing at all like an excessive credit boom in CEE. Looking at the three major CEE banking markets (Russia, Poland, Romania), financial deepening in recent years (2009-12) was well below its long-term average, while in other EM and the BRICS (ex. Russia), financial deepening was well above its long-term trend. It goes without saying that credit booms in EMs also drove C/A deficits in some of the current hotspots such as Turkey or Brazil.

Moreover, the regional (European) economic environment is now more favour-able for CEE. In 2008-2009, CEE was dragged down by the integration with a recessionary Western Europe and distrust in Euro area crisis management. Now, Euro area disintegration fears have decreased, and the strong German economy and clear signs of improvement even in the Euro area periphery are helping the CEE economies with strong manufacturing and trading links to Western Europe. By contrast, many EM countries in LatAm or Asia have to adjust to the end of a rally in commodity prices (such as Brazil – but also Russia) and the gradual slow-down in Chinese economic growth. Furthermore, global EMs are just learning the lesson that future economic growth rates are likely to be lower after a very strong decade-long boom. This learning effect is already well priced in for most CEE economies following their rapid catch-up seen from 2000 to 2008.

Statements on country aggregates are generalisations and usually there are sig-nificant differences in country fundamentals. Among European EMs, Ukraine and Turkey can be singled out, given their (still) elevated C/A deficits. In the case of Turkey, the exchange rate has already adjusted significantly. Ukraine remains in a precarious situation as with a fixed currency there is no “easy” adjustment tool. Thus, Ukrainians once again have to fear that their currency peg will snap. Finally, Russia is suffering from a secular decline in growth, which in combination with its weaknesses in business and investment climate worries investors. That said the re-cent outperformance of CEE vs. global EM assets may not hold over the next 6-12 months. In recent weeks, we have just seen an initial correction of capital flows that were induced by the lax global monetary policy. It is most likely that only the most speculative flows have reversed. Another round of outflows may still hit some of the more vulnerable CEE economies (such as Ukraine, Hungary or Belarus) as the coming years will be characterised by a de-facto reversal of the globally ex-pansionary monetary policy and a global yield uptrend, which will induce more country differentiation among EMs and will most likely challenge fundamentally weaker countries. Moreover, a more sustained stabilisation in the Euro area could also add some pressure on CEE markets. If the persistent investor doubts about Italy and Spain – both with sizeable debt markets – continue to decrease, these markets will look attractive compared to some small CEE fixed income markets that are currently priced very tight. Hence, modest movements on large Western European fixed income markets could also trigger strong moves on smaller CEE fixed income and currency markets going forward (as we have seen in recent weeks on global EM markets induced by changes in the US market).

Gunter Deuber, Andreas Schwabe, CFA

-20% 20% 60% 100%

Developed Markets

CEE

Africa & MidEast

Russia

Global EM

LatAm & Caribean

Asia & Pacific

Current account balances (% of GDP)

Source: IMF WEO

-12

-8

-4

0

4

8

12

UA TR ZA IN RO PL BR CZ HU RU CN

2008 2013

CEE vs. EM: Bank growth divergence**

*CEE-3: Poland, Russia, Romania** Country averages not GDP-weightedSource: World Bank, national sources, Raiffeisen RESEARCH

012345

EM BRICS (ex.RU)

CEE-3*

Annual chg. loan-to-GDP ratio (long-termtrend, pp)Annual chg. loan-to-GDP ratio (2009-2012,pp)

12 4th quarter 2013

Austria

During the first quarter of 2013, the Austrian economy expanded at the slow pace of 0.1% qoq, but this growth was still better than the growth rates registered in the Euro area and in Germany. During the second 3-month period, however, economic activity failed to accelerate in Austria (Q2: +0.1% qoq), in contrast to many other EUR countries. As a result, the Austrian economy has been in a period of stagnation since Q3 2012.

Despite the modest performance in the first half of the year, the latest releases of key leading indicators point to a recovery in economic activity in the quarters to come. For example, the economic sentiment indicator surged higher in Au-gust: the index released by the European Commission increased by 3.9 points, advancing to 96.3 and thus once again moved closer to the long-term average (100 points). An even more dynamic development was seen in the purchasing managers’ index for the manufacturing sector, which posted an increase of 2.9 points in August and thus moved not only to the highest level since February 2012, but climbed also above the important 50-point mark. This indicates that the economic outlook is brightening up. For 2013 as a whole, we still project real GDP growth of 0.5%. The anticipated upturn in economic activity should reach its high point in Q4 2014/Q1 2015, as reflected in the projected GDP growth rates of 1.5% and 2.3% for 2014 and 2015, respectively.

In the industrial sector, sentiment improved again recently somewhat (according to the industrial confidence indicator compiled by the European Commission), but remains lower than the long-term average. To a great degree, this improvement in sentiment has been borne by the new orders component. Along with output, new orders also played an important role in the rise in the purchasing managers’ index for the manufacturing sector. In August, the output component was at its

Domestic demand acts as a drag on economic activity

Uptick in economic activity signalled

Labour market: No turnaround yet

* European Commission, r.h.s.Source: Thomson Reuters, Markit, Raiffeisen RESEARCH

*seasonally adjustedSource: Thomson Reuters, Raiffeisen RESEARCH

Key economic figures and forecasts

2012 2013e 2014f 2015f

Real GDP (% yoy) 0.9 0.5 1.5 2.3

Private consumption (% yoy) 0.5 -0.2 0.8 1.8

Gross fixed capital formation (% yoy) 1.6 -2.6 2.1 3.9

Nominal exports (% yoy) 3.8 3.7 7.1 8.8

Nominal imports (% yoy) 2.3 1.7 6.6 9.2

Trade balance (goods and services, EUR bn) 9.9 13.6 15.2 15.8

Current account balance (EUR bn) 5.5 6.9 7.1 5.7

General budget balance (EUR bn)* -7.7 -9.0 -6.5 -3.3

General budget balance (% of GDP)* -2.5 -2.9 -2.0 -1.0

Unemployment rate (avg, %, EU definition) 4.4 5.0 4.8 4.4

Consumer prices (avg, % yoy) 2.6 1.9 2.1 2.3

Real wages (% yoy) 0.7 0.6 0.1 0.4

Unit labour costs (% yoy) 3.0 2.5 1.4 1.9* state, provinces, municipalities and social security authoritiesSource: Statistics Austria, Thomson Reuters, Raiffeisen RESEARCH

60

70

80

90

100

110

120

130

30

35

40

45

50

55

60

65

Jan-03 Jan-06 Jan-09 Jan-12

PMI ManufacturingEconomic Sentiment Indicator*

15

25

35

45

190

230

270

310

Feb-02 Mar-05 Apr-08 May-11

Unemployed persons* (thsd., nationalstatistics)Vacancies* (thsd., national statistics,r.h.s.)

Modest economic growth in H1 Domestic demand as a negative factor Significant improvement in leading indicators recently Decline in imports helps reducing the trade deficit

134th quarter 2013

Austria

highest level since May 2011. Despite the recent weak performance in industrial production, we thus expect an upturn in industrial activity in the quarters to come, and this should also help to stimulate the lacklustre investment activity.

Despite the ongoing stable development of employment, private consumption was a minor drag on economic per-formance in recent quarters, although this negative im-pact is fading. As the level of employment should stagnate for the rest of the year, only small increases in private consumption are anticipated. Due to the trailing nature of the labour market, the anticipated pick-up in activity will only be seen in employment in early 2014, which will then push private consumption up again somewhat. Despite the mild overall improvement in consumer confi-dence, consumer sentiment will probably also be slightly undermined by the outlook for further increasing unem-ployment in the months to come. The sustained decline in job vacancies does not seem to indicate that a turnaround will occur in the immediate future.

In the quarters ahead, foreign trade will probably con-tinue to act as a strong source of support for the Austrian economy, making the largest contributions to growth. Only during 2014, domestic demand should take over the helm from foreign trade as the economic growth driver. While exports will likely profit from an upturn in economic activity in the Euro area, the development of imports should be less dynamic and only begin to pick up again later, as the domestic economy starts to recover. The trade deficit has fallen sharply as a result of declining imports (goods) and an almost steady export level and this suggests that the trade deficit (goods) for 2013 as a whole will also be much lower. Together with a further improving services balance, this will be the main factor behind the anticipated increase in the current account sur-plus (as a percentage of GDP).The annual percentage rate of change in consumer prices should continue to fall, averaging 1.9% for the year as a whole. Slightly higher inflation rates are expected in 2014 and 2015, in part due to the anticipated pick-up in economic activity.

Matthias Reith

GDP: expenditure composition

Change (% yoy, in real terms) 2012 2013e 2014f 2015f

Private consumption 0.5 -0.2 0.8 1.8

Public consumption 0.2 0.9 0.6 0.5

Gross fixed capital formation 1.6 -2.6 2.1 3.9

Equipment 2.1 -6.0 3.0 4.5

Construction 2.5 0.5 1.3 3.3

Exports (broad definition) 1.2 1.8 4.9 6.4

Imports (broad definition) -0.3 -0.2 4.4 6.7

Gross domestic product 0.9 0.5 1.5 2.3Source: Statistics Austria, Raiffeisen RESEARCH

GDP: value added by sector

Change (% yoy, in real terms) 2012 2013e 2014f 2015f

Agriculture & forestry -8.0 -0.5 0.0 0.0

Prod. of goods/mining 1.1 0.5 2.5 4.0

Energy/water supply 9.7 7.0 2.0 4.0

Construction 0.8 1.0 1.5 2.5

Wholesale and retail trade -1.7 -0.5 1.0 2.0

Transportation -1.0 -0.5 1.0 2.5

Accom. & restaurant trade 1.6 -2.0 1.0 1.5

Information and communication -1.5 -1.0 1.0 2.0

Credit and insurance 2.7 1.5 1.0 1.5

Property & business services 1.7 1.0 2.0 2.5

Other economic services 0.8 -0.5 2.5 3.0

Public sector -0.2 0.2 -0.1 -0.1

Healthcare, social services 2.0 1.3 1.5 1.5

Other services 1.1 1.3 0.8 1.5

Gross domestic product 0.9 0.5 1.5 2.3Source: Statistics Austria, Raiffeisen RESEARCH

Contributions1 to real GDP growth (qoq)

1 in percentage pointsSource: Thomson Reuters, Raiffeisen RESEARCH

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

Q4

11

Q1

12

Q2

12

Q3

12

Q4

12

Q1

13

Q2

13

Q3

13

Q4

13

Q1

14

Q2

14

Private Consumption Public Consumption InvestmentStocks External Trade Real GDP

Forecast

14 4th quarter 2013

-6-4-202468

10

2009

2010

2011

2012

2013

e

2014

f

2015

f

Real GDP (% yoy)Industrial output (% yoy)

Real GDP (% yoy)


Poland

Ready …set … go: Recovery!

45

48

51

54

57

60-10

-8

-6

-4

-2

0

2009

2010

2011

2012

2013

e

2014

f

2015

f

General budget balance (% of GDP)Public debt (% of GDP, r.h.s.)

Budget balance and public debt


Forecast


2009 2010 2011 2012 2013e 2014f 2015f

Nominal GDP (EUR bn) 311.1 354.7 370.4 381.6 389.6 422.9 458.1

Real GDP (% yoy) 1.7 3.9 4.5 1.9 1.2 2.5 3.0

Industrial output (% yoy) -4.5 9.0 7.5 0.8 3.0 4.2 8.1

Unemployment rate (avg, %) 11.0 12.1 12.4 12.8 14.0 13.1 12.7

Nominal industrial wages (% yoy) 4.4 3.3 5.0 3.4 2.8 3.3 5.0

Producer prices (avg, % yoy) 3.4 2.1 7.6 3.3 -1.0 2.5 2.5

Consumer prices (avg, % yoy) 3.5 2.6 4.3 3.7 1.2 2.0 2.5

Consumer prices (eop, % yoy) 3.5 3.1 4.6 2.4 1.9 2.2 2.5

General budget balance (% of GDP) -7.4 -7.9 -5.0 -3.9 -4.1 -3.8 -3.4

Public debt (% of GDP) 50.9 54.8 56.4 55.6 57.1 57.6 57.2

Current account balance (% of GDP) -3.9 -5.1 -4.9 -3.5 -2.6 -4.0 -4.0

Official FX reserves (EUR bn) 55.2 70.0 75.7 82.6 87.0 91.0 94.0

Gross foreign debt (% of GDP) 62.5 66.9 67.0 72.4 73.1 70.9 69.0

EUR/PLN (avg) 4.33 3.99 4.12 4.19 4.17 4.04 3.93

USD/PLN (avg) 3.10 3.01 2.96 3.26 3.18 3.11 3.02


Forecast

Economic outlookThe recovery of the Polish economy continues according to recent data, as GDP growth in Q2 reached 0.8% yoy. The main driver was once again foreign trade. The structure of economic growth was surprising as investments fell by 3.8% yoy. This can be attributed to a cold April and the base effect in the wake of prepara-tions for EURO2012. Private consumption returned to growth (0.2% yoy), signal-ling improvement in both consumer confidence and the labour market. Another surprise was the sharp 3.9% yoy rise in public consumption, which suggests that the government has scaled back fiscal consolidation plans. This trend is likely to continue in light of the planned pension system reform (see also the Special cov-erage on page 48), allowing for more borrowing and pre-financing projects in-volving EU funds. In the quarters to come, public spending dynamics may remain high, accompanied by a gradual recovery in private spending and investment. All this should lift GDP growth to 1.6% yoy in Q4 2013.Meanwhile, the unemployment rate stabilised and wages dynamics seem to have embarked on an upward trend. Altogether we expect the unemployment rate in 2013 to reach 14% and average 13.1% in 2014, when the improvement on the labour market also becomes visible in positive annual growth rates for pri-vate payrolls. CPI inflation accelerated to 1.1% yoy in July, against 0.2% yoy in June, mainly driven by a jump in regulatory prices related to garbage collection. Recent developments will lift the overall CPI forecast in the coming months, and in December we expect the CPI will come in at 1.9% yoy. Interest rates, however, will stay unchanged at 2.5% until as late as mid-2014 as the MPC reiterated that demand-driven inflationary pressure remains low and economic growth is still below potential. All in all, the Polish economy is currently developing accord-ing to our call from some months ago, i.e. a structurally sound economy with a sound banking sector is well positioned to surprise on the upside. A sustained

Economy gathers momentum, supported by foreign trade and accommodative domestic policies MPC unlikely to raise rates very quickly in 2014, even though inflation is already accelerating Modest appreciation for PLN with increasing risk of volatility, but downside risks limited Recovery and monetary policy will send yields on a secular uptrend after Q4 2013

154th quarter 2013

2.22.52.83.13.43.74.04.34.64.9

0 1 2 3 4 5 6 7 8 9 10Yields as of Sep-13Yield curve Sep-13Yield curve Jun-13Forecast Dec-13

4.0

4.1

4.2

4.3

4.4

4.5

Sep-11Mar-12Sep-12Mar-13Sep-13Mar-14EUR/PLN (eop)

Poland

Exchange rate development

Source: Bloomberg, Raiffeisen RESEARCH

PLN rate and yield curve (%)*

* 1m – 12m interest rates; 2y – 10y LCY gov. bond yieldsSource: Bloomberg, Raiffeisen RESEARCH

Fore

cast

Exchange rate forecasts

17-Sep1 Dec-13Mar-14 Jun-14 Sep-14

EUR/PLN 4.21 4.15 4.10 4.00 4.05

Cons. 4.17 4.13 4.10 4.08

USD/PLN 3.15 3.19 3.13 3.10 3.16

Cons. 3.26 3.24 3.22 3.211 5:00 p.m. (CET)Source: Bloomberg, Raiffeisen RESEARCH

Interest rate forecasts

17-Sep1 Dec-13 Mar-14 Jun-14 Sep-14

Key rate 2.50 2.50 2.50 2.50 2.75

Consensus 2.50 2.50 2.50 2.63

1 month2 2.41 2.63 2.63 2.64 2.88

3 month2 2.50 2.73 2.75 2.80 3.10

Consensus 2.67 2.71 2.75 2.88

6 month2 2.53 2.75 2.90 3.00 3.35

12 month2 2.57 2.90 3.05 3.40 2.801 5:00 p.m. (CET) 2 Bid rateSource: Bloomberg, Raiffeisen RESEARCH

Yield forecasts


2y T-bond2 3.01 3.23 3.38 3.50 3.63

Cons. 3.11 3.23 3.36 3.46

5y T-bond2 3.80 3.87 3.96 4.05 4.1510y T-bond2 4.42 4.55 4.60 4.68 4.78

Cons. 4.33 4.42 4.48 4.631 5:00 p.m. (CET) 2 Ask yieldSource: Bloomberg, Raiffeisen RESEARCH

economy recovery may also help to increase the popularity and stability of the currently unpopular ruling (liberal) government. This is important as otherwise early elections (before 2015) might loom. Recently three members of the ruling Civic Platform (PO) left the party leaving the coalition with only a 2-seat majority in Parliament. The risk of early election is, however, still low unless much more members will leave the PO.

Financial market outlookOver the last few months, Polish bond and currency markets were dominated by shifts in expectations for QE3 tapering by the Fed. The near to media-term change in the Fed’s policy now seems to be priced in to a large extent, which in our opinion should result in less market influence going forward. Moreover, Fed-induced pressure on the Polish market was still modest compared to other large global EMs outside CEE. This shows that Poland has not received very much spec-ulative Fed-induced inflows, but more diversification flows over the last few years, i.e. European or global investors which diversified their portfolios away from the Euro area periphery. Nevertheless, recent moves on the Polish sovereign bond market have shifted yields up. This trend is likely to continue in the quarters to come; only Q4 2013 might be still be an exception with relatively stable yields. Most importantly, the economic recovery in Europe should gain momentum which should also result in an inevitable rise in Polish and Bunds yields. Furthermore, the expected improvement in risk appetite and the domestic economy may result in shifts of capital from Polish bonds to the equity market. Going forward, we expect that the recent high correlation between PLN and gov-ernment paper will gradually diminish. The economic recovery and the outlook for a rising key rate in H2 2014 – well before the ECB – could prove positive for PLN, limiting downside pressure during periods of high risk aversion. Therefore, we expect a modest appreciation of EUR/PLN towards levels around 4.0 in 2014. Meanwhile, in the coming months several risk factors (such as the Fed’s policy and potential communication mistakes, political risks in Europe) could still result in shifts in market sentiment, causing increased volatility for the Polish cur-rency and EUR/PLN increases above the 4.20 level.Among domestic factors, the main risks to the outlook for the Polish market still stem from fiscal policy changes after the recent government decision to suspend the first debt-to-GDP threshold of 50% and changes to the pension system, which raised concerns among investors and rating agencies about medium-term fiscal consolidation and the overall credibility of the sound-looking domestic fiscal gov-ernance framework.

Dorota Strauch, Pawe³ Radwañski

16 4th quarter 2013

-20-16-12-8-404812

-10-8-6-4-20246

2009

2010

2011

2012

2013

e

2014

f

2015

f

Real GDP (% yoy)Industrial output (% yoy, r.h.s.)

0

50

100

150

2009

2010

2011

2012

2013

e

2014

f

2015

f

Public debt (% of GDP)Gross foreign debt (% of GDP)

Real GDP (% yoy)


Hungary

Election time fiscal loosening ahead

Public and external debt


Forecast

Forecast


2009 2010 2011 2012 2013e 2014f 2015f


Real GDP (% yoy) -6.8 1.3 1.6 -1.7 0.5 1.5 1.5

Industrial output (% yoy) -17.8 10.6 5.4 -1.7 1.0 3.0 3.5



Producer prices (avg, % yoy) 4.9 4.5 4.3 4.3 1.5 3.5 3.0



General budget balance (% of GDP) -4.6 -4.3 4.3 -1.9 -2.9 -2.9 -2.9


Current account balance (% of GDP) -0.2 1.1 0.8 1.9 2.6 2.8 2.5



EUR/HUF (avg) 280.10 275.50 279.32 289.20 297.50 303.75 300.00

USD/HUF (avg) 200.91 207.69 200.69 224.95 227.10 233.65 230.77


Economic outlookGDP turned positive in H1 2013, but after the benign 0.6% rise in Q1 the quar-terly growth was quite minuscule in Q2, coming in at a mere 0.1%. The economy is benefiting from the new auto production plants and relatively good agricultural output, as well as from public sector investments. The latter component not only allowed for a positive investment figure in Q2, but also ended the 7-year long period of misery and the continued fall in the construction industry. Household consumption also increased in Q2, albeit very slowly still. Nonetheless, economic growth remains extremely low and is far from being evenly spread across the economy.The central bank’s Lending for Growth programme is a good initiative to ease the refinancing burden for the SME sector (HUF 750 bn / EUR 2.5 bn in cheap funding from the central bank disbursed through the commercial banks). The pro-gramme was expanded: by December 2014 another HUF 2000 bn (EUR 6.7 bn) is to be made available for SME financing. If fully utilised, the programme will amount to close to 10% of GDP and should be a strong tool for reigniting invest-ment activity in the SME sector.Given that elections are coming in Q2 2014, the government’s priority list has changed: less attention is paid to keeping the budget deficit low and more at-tention is being paid to implementing voters’ sweeteners. Some of these directly increase the budget deficit (wage increases in public health care and education), while others put a burden on the corporate sector (i.e. utility price cuts). Another hot topic for the autumn is the new programme to ease the burden of problem-ridden FX mortgages. This seems to be a highly politicised issue with no certain “solution” yet. There is a risk that fiscal slippage will not be sufficiently counterbal-anced by either expenditure cuts or further tax hikes, and therefore the European Commission would re-launch the excessive deficit procedure.

Economy returns to a slow, uneven growth path Central bank’s expanded SME lending programme should boost private investments Fiscal slippage might result from pre-elections sweeteners GDP growth is seen to slowly accelerate – we expect 1.5% growth in 2014

174th quarter 2013

Hungary

280

290

300

310

320

Sep-11Mar-12Sep-12Mar-13Sep-13Mar-14

EUR/HUF (eop)



3.03.54.04.55.05.56.06.57.0


HUF rate and yield curve (%)*


Fore

cast



EUR/HUF 297.11 300.0 305.0 300.0 305.0

Cons. 298.00295.00293.00290.00

USD/HUF 222.46 230.8 232.8 232.6 238.3

Cons. 233.0231.00 230.0 228.01 5:00 p.m. (CET)Source: Bloomberg, Raiffeisen RESEARCH



Key rate 3.803 3.50 3.20 3.20 3.20

Consensus 3.50 3.63 3.63 3.75

1 month2 3.80 3.60 3.30 3.30 3.30

3 month2 3.75 3.80 3.50 3.60 3.70

Consensus 3.68 3.76 3.91 3.88

6 month2 3.75 3.90 3.83 3.83 4.03

12 month2 3.68 4.10 4.50 4.30 4.701 5:00 p.m. (CET) 2 Bid rate 3 20bp cut to 3.60% on 23 September 2013Source: Bloomberg, Raiffeisen RESEARCH

Yield forecasts


3y T-bond2 4.14 4.45 4.90 4.70 5.00

Cons. n.a. n.a. n.a. n.a.

5y T-bond2 5.33 5.90 6.20 6.00 6.2010y T-bond2 5.89 6.50 6.80 6.50 6.80


Public sector demand is expected to rise in 2014. Household consumption de-mand is still feeble, but will pick up slowly and gradually in the coming quarters. We expect GDP to expand by 1.5% next year.

Financial market outlookIn Q3, EUR/HUF remained remarkably stable in a fairly tight trading range of 290-305, despite global discussions about tapering that led to pressure on FX rates in numerous EM countries and internal pressure caused by political topics (e.g. FX mortgage scheme). On the other hand, there were also positive factors such as the slow economic improvement during the first half of 2013 that did not manage to give support to the HUF.This scenario of sideways movement in EUR/HUF is likely to remain in Q4 2013 in our view, even though it must be mentioned that the forint remains a vulnerable currency with considerable risks in the case of unforeseen external or internal events. From a domestic point of view, the main topics should continue to be the FX mortgage loan conversion scheme that the government is pursuing, as well as the continued interest rate-cutting cycle. On the positive side for HUF, we expect the economic situation in H2 2013 to continue improving, albeit at a slow pace.Movements in yields in Q2 were clearly more pronounced than the FX devel-opments. In the 10-year segment, yields moved between 5.65% and 6.74% in Q3. In the fourth quarter, the yield curve is likely to steepen even further as the Monetary Council will continue to cut interest rates. Given the benign inflation en-vironment as well as the stable forint, we expect the rate-cutting cycle to continue on until the second quarter 2014. Compared to the speedy rate cuts seen in the recent months (since August 2012) the coming rate reductions are, however, likely to be more moderate. The Monetary Council already indicated at its July meeting that they would use smaller steps of 10bp. Despite this announcement, the cuts in August and September were both 20bp, most likely as the Council wanted to take advantage of the benign market environment.Yields on the long end should remain at the current levels of about 6.5% in the fourth quarter, even though short-term volatility should remain high, keeping the yield between 5% and 7%. For the quarters ahead, we forecast a continued rise in yields in line with developments in the Euro area, with a possible spike in yields during the uncertain pre-election phase. Despite the projected rise in yields for 2014, we expect the Monetary Council to deny interest rate increases as long as possible.

Zoltan Török, Wolfgang Ernst

18 4th quarter 2013

-15

-10

-5

0

5

10

-5

-3

-1

1

3

5

2009

2010

2011

2012

2013

e

2014

f

2015

f


Czech Republic

0

10

20

30

40

50

60-12

-10

-8

-6

-4

-2

0

2009

2010

2011

2012

2013

e

2014

f

2015

f


Public debt (% of GDP, r.h.s.)

Real GDP (% yoy)


Cyclical turnaround for the economy



Forecast

Forecast


2009 2010 2011 2012 2013e 2014f 2015f


Real GDP (% yoy) -4.4 2.3 1.8 -1.2 -1.0 1.9 2.4

Industrial output (% yoy) -13.4 10.1 6.9 -1.2 -0.5 3.7 4.9



Producer prices (avg, % yoy) -3.1 1.2 5.6 2.1 0.8 1.8 2.1








EUR/CZK (avg) 26.40 25.28 24.59 25.10 25.70 25.05 24.60

USD/CZK (avg) 18.94 19.06 17.67 19.52 19.62 19.27 18.92


Q2 GDP data ended the longest recession in Czech history Fiscal straitjacket for the budget until new government in power CNB is divided over intervention which would hinder CZK appreciation Yields expected to move in line with German Bunds, spread to remain near 50bp

Economic outlookCzech GDP grew by 0.6% qoq in Q2 following a deep decline of 1.3% qoq in Q1. Accordingly, the end of the longest recession in the history of Czech Repub-lic (lasting 6 quarters) has been confirmed. Moreover, our scenario of a cyclical recovery in the Czech economy is playing out. Expansion is mainly driven by external demand as the Euro area economy escaped recession. High frequency indicators (especially PMI and industrial orders) indicate that the recovery will continue in the coming quarters as well. However, given the downward revision in Q1, we had to revise our GDP forecast for 2013 down to -1%. But this does not change the overall story at all. For 2014, we forecast the recovery to con-tinue at slightly faster pace than at present, and thus GDP is expected to expand by 1.9%. The recovery is expected to be driven by fixed investment, consumption and a positive contribution from net exports. One risk to our forecast is tight fiscal policy at the beginning of 2014 (see below). We expect potential growth to be reached in late 2015 or at the beginning of 2016.

In June 2013, the centre-right coalition government dissolved the Parliament amid a wide-reaching police investigation. Later, the interim government led by economist Jiri Rusnok lost a confidence vote on 7 August. Early elections are scheduled to take place on 25-26 October 2013, just a few months before the regular elections scheduled for May/June 2014. A leftist government is the most likely outcome of early elections according to opinion polls. However, the elections might not produce a majority government. The political scene is very fragmented and turbulent now. Recent opinion polls show, for the time being, a victory for the Social Democrats followed by the Communists. The centre-left Social Democrats are calling for higher direct taxes as of 2015 (company tax rate of 20-21% instead of current 19%, selective taxes on financial, energy and

194th quarter 2013

Czech Republic

24.4

24.8

25.2

25.6

26.0

26.4


EUR/CZK (eop)



0.00.51.01.52.02.53.03.5

0 1 2 3 4 5 6 7 8 9 10

Yields as of Sep-13Yield curve Sep-13Yield curve Jun-13Forecast Dec-13

CZK rate and yield curve (%)*


Fore

cast



EUR/CZK 25.73 25.50 25.40 25.10 24.90

Cons. 25.90 25.70 25.50 25.20

USD/CZK 19.27 19.62 19.39 19.46 19.45




Key rate 0.05 0.05 0.05 0.05 0.05

Consensus 0.05 0.08 0.13 0.18

1 month2 0.05 0.05 0.05 0.05 0.05

3 month2 0.13 0.20 0.20 0.20 0.20

6 month2 0.19 0.30 0.33 0.33 0.33


Yield forecasts


2y T-bond2 0.21 0.30 0.40 0.60 0.80

Cons. 0.52 0.58 0.66 0.79

5y T-bond2 1.28 1.50 1.70 2.00 2.1010y T-bond2 2.26 2.60 2.80 3.10 3.20


telecommunications companies of 25-30% and a 30% income tax on high wage-earners). They promise to increase property taxes (one of the lowest in EU-27). Overall, the general tax burden might increase to historic highs, but it should not exceed the EU average.If the new government is not formed very soon after the elections, the Czech Republic will likely operate in a stop-gap budget regime at the beginning of 2014. Accordingly, the Czech economy would be tied into a 2013-style fiscal straitjacket for a couple of months. However, the regular state budget that would be approved in the course of 2014 is expected to compensate for the possible restrictive stance at the beginning of 2014. Overall, we expect the 2014 budget to be pro-growth, and the deficit to be set marginally below 3% of GDP.

Financial market outlookDuring the last quarter, the Czech koruna appreciated only marginally. The low-est EUR/CZK point was at 25.60. The economic recovery has alleviated some of the pressure faced by central bankers up until recently. As we forecast that the economic recovery will continue and that economic development in the Euro area might even surprise on the upside, the Czech koruna could tend to appre-ciate again. On the other hand, the current level of inflation of 1.3% and the monetary policy inflation (without indirect tax changes) of 0.5% is very low. At the beginning of 2014, CPI inflation will be probably slightly below the lower bound of the Czech National Bank’s tolerance band. The CNB will probably stick to its current wording, repeating the possibility of FX intervention. The CNB is divided over the idea of intervention. If only one more of the 7 CNB board members decides to intervene, we will get it. Thus, although we do not expect CNB intervention, we realise that the CNB is on the verge of trying it. This will hinder any more sizeable CZK appreciation in the near future.With the decline for German Bunds, prices of Czech government bonds declined as well. We expect that domestic financing conditions will remain supportive in the quarters to come, but that global issues will probably push yields even higher. The above mentioned political situation also represents a potential risk for prices of Czech government bonds, but at this juncture it is almost impossible to make any serious projections in this regard. For 2015, significant changes to fiscal policy settings are unlikely. Interest rate hikes will probably not occur any time soon. We foresee the first repo rate hike by the end of 2014. We expect that the 10-year government bond yields spread over German Bunds will stay roughly around 50bp in the coming quarters. Assuming rising Bund yields, we are still negative on Czech government bonds with longer maturities.

Michal Brozka, Vaclav France

20 4th quarter 2013

Slovakia

0

15

30

45

60-8

-6

-4

-2

0

2009

2010

2011

2012

2013

e

2014

f

2015

f





Forecast

-15

-10

-5

0

5

10

15

-6

-4

-2

0

2

4

6

2009

2010

2011

2012

2013

e

2014

f

2015

f


Revival in household consumption

Forecast

Real GDP (% yoy)

Exports losing steam, but remain a key growth driver, some compensation by increasing domestic economic activity Modest inflation to support household consumption in 2013, but H1 wage growth will not be repeated Fiscal consolidation for the years to come has recently been relaxed Possibly some upward pressure on yields as other “core” Euro area members more committed to fiscal consolidation


2009 2010 2011 2012 2013e 2014f 2015f


Real GDP (% yoy) -4.9 4.4 3.2 2.0 0.9 2.0 3.0




Producer prices (avg, % yoy) -2.5 -2.8 2.6 3.9 -0.1 2.0 3.0





Current account balance (% of GDP) -2.6 -3.7 -2.0 2.3 3.1 3.0 3.1


EUR/SKK (avg)1 30.13 Euro area membership at EUR/SKK 30.1261 Euro area entry on 1 January 2009Source: Thomson Reuters, Raiffeisen RESEARCH

After three and a half years of decrease or stagnation, household incomes re-corded positive annual growth in Q2 (+1.5% yoy). However, the most support-ive factor for the economy is still foreign trade, albeit growth is decelerating somewhat. Investment activity stayed in the red in Q2 (-6.4% yoy). In line with our expectations, government consumption stagnated on an annual basis due to the pressure to consolidate public finances. Despite the unfavourable develop-ment of employment (decrease by 0.2% in Q2), July retail sales data provided further glimmers of hope for domestic consumption. Moreover, price develop-ments should also be supportive for private consumption as we expect average annual inflation around 1.6% in 2013. On the other hand, we consider the wage growth seen in H1 2013 as unsustainable, and thus household consumption will also face some headwinds in H2 2013. The government aims to decrease the budget deficit to 2.9% of GDP in 2013, but the recent estimate (August 2013) is 3.04% of GDP. This mild revision should not cause any worries among investors. However, further planned deficit decreases in 2014-2016 were postponed. The government now just wants to keep the deficit at 2.9% of GDP in 2014 at the expense of a higher public debt level, and then to bring it down to only 2.6% of GDP in 2015 (previous deficits targets were 2014: 2.3% of GDP and 2015: 1.7%). Deficit reduction should be mainly based on public administration reorganisation and better tax collection. These savings measures might not materialise as expected and even the less ambitious deficit target for 2014 looks questionable. We want to reiterate that less ambitious fis-cal consolidation could induce some modest pressure on Slovak bond yields as some other “core” Euro area countries (such as Germany, Finland and possibly Austria) are progressing more quickly with fiscal consolidation.

Gunter Deuber, Juraj Valachy

214th quarter 2013


2009 2010 2011 2012 2013e 2014f 2015f


Real GDP (% yoy) -7.8 1.2 0.6 -2.3 -2.0 0.0 1.5









Current account balance (% of GDP) -0.6 -0.1 0.4 3.2 3.6 3.2 2.1



EUR/USD (avg)1 1.39 1.33 1.39 1.29 1.31 1.30 1.30

1 Euro area entry on 1 January 2007Source: Thomson Reuters, Raiffeisen RESEARCH

Slovenia

Bad bank transfer delayed

Q2 GDP better than expected, but the economy remains in the doldrums Budget deficit goal of 3% in 2014 seems very optimistic Waiting for the European Commission to give the go-ahead for transfers to the bad bank Political situation could deteriorate, given the need for aggressive fiscal consolidation

-20

-15

-10

-5

0

5

10

-8

-6

-4

-2

0

2

4

2009

2010

2011

2012

2013

e

2014

f

2015

f


0

20

40

60

80

100

12020

09

2010

2011

2012

2013

e

2014

f

2015

fPublic debt (% of GDP)Gross foreign debt (% of GDP)

Real GDP (% yoy)


Public and external debt


Forecast

Forecast

After the very disappointing Q1 GDP data, the second quarter surprised a bit on the upside with -1.7% yoy. Nevertheless, Slovenia remains in a deep recession and 2013 GDP is likely to decline by 2%. Some minor signs of recovery are expected to come from exports in the second half of 2013, while household and government consumption should remain weak.Given the planned capital injections into the largely state-held banking sector, the budget deficit in 2013 is expected to increase to a staggering 8% of GDP. For 2014 and 2015, a goal of 3% of GDP is envisaged, but given our current expectations we do not project the 3% deficit goal to be reached before 2015.The start of transferring bad loans from the banking sector to a so-called bad bank has been postponed at the request of the European Commission, which is waiting for a stress test before approving the transfers. This postponement has already caused severe doubts about Slovenia’s ability to deal with the situation without external help by the EU. While up until recently the Slovenian govern-ment was planning to go ahead with the transfer to the bad bank by October, the schedule has now moved to end of November, according to Finance Minister Cufer. Pressure from the EU and the ECB to accept external help is mounting.Meanwhile, the central bank decided to wind down Factor Banka and Probanka through a supervised liquidation in a first step towards restructuring the banking sector.Politically, the situation could deteriorate in the coming months as well. Rumours about tensions in the coalition are mounting, as cost-cutting measures will be needed to achieve the deficit goals for 2014 and 2015. This entails additional risks in the coming months, even though we currently do not expect a breakup of the coalition.

Wolfgang Ernst

22 4th quarter 2013

-10-8-6-4-2024

2009

2010

2011

2012

2013

e

2014

f

2015

f


0

1

2

3

4

5

6-6

-5

-4

-3

-2

-1

0

2009

2010

2011

2012

2013

e

2014

f

2015

f

Current account (% of GDP)Net FDI (% of GDP, r.h.s.)

Real GDP (% yoy)


Investment activity finally picking up?

Current account and FDI inflows


Forecast

Forecast


2009 2010 2011 2012 2013e 2014f 2015f


Real GDP (% yoy) -6.9 -2.3 0.0 -2.0 -0.5 1.0 1.5

Industrial output (% yoy) -9.2 -1.4 -1.2 -5.5 -1.5 2.0 3.5


Nominal industrial wages (% yoy) 0.8 0.0 1.3 1.9 -1.0 0.0 2.0






Current account balance (% of GDP) -5.1 -1.0 -0.9 0.0 -0.7 -0.9 -0.6



EUR/HRK (avg) 7.34 7.29 7.43 7.52 7.55 7.50 7.50

USD/HRK (avg) 5.26 5.49 5.34 5.85 5.76 5.77 5.77


Economic growth in H2, but FY 2013 in negative territory Excessive Deficit Procedure as a path to fiscal consolidation Pronounced depreciation pressures on HRK Eurobonds in line with core market yield increases

Croatia

Economic outlookAfter a decline in H1, Q3 is expected to feature some annualised growth in GDP mostly amid fairly good results from tourism. Initial figures for Q3 point to a mild increase in retail trade, but also to continued negative developments in industrial production. Industry is adversely affected by restructuring in key sectors, such as shipbuilding, the chemical industry and the manufacture of coke and refined petroleum products. The weak industry performance lowers goods exports even further. Goods exports are also adversely affected by the loss of preferential position in the CEFTA markets upon EU entry. However, exports of services are helping to mitigate the poor goods exports. After 17 consecutive quarters in neg-ative territory, investments were finally positive in Q2, thanks to increased public spending while private investments most likely failed to recover. On the other hand, there are some indications that the investment cycle in the private sector has already begun and should pick up by the end of the year. For example, imports of capital goods and industrial supplies increased significantly in H1. Although H2 should see growth in GDP, 2013 will be the fifth year of recession in Croatia. Next year, investments should also be the driver behind GDP growth. Imports below pre-crisis levels and higher revenues from tourism should still keep the C/A deficit close to zero in 2013, and further deterioration should be limited in 2014. The biggest adjustment next year is expected in public finances. So far, fiscal consolidation has only been carried out on the revenue side (increased VAT, improved tax collection). This had a one-off positive effect on the budget, but revenues declined in Jan-Aug 2013. Therefore, the budget deficit in H1 already exceeded the planned deficit for the whole year and will amount to some 4.5% of GDP. With public debt (without guarantees) at around 60% by the end of the year, Croatia will most likely enter Excessive Deficit Procedure in 2014, which should finally result in consolidation on the expenditure side.

234th quarter 2013

7.40

7.45

7.50

7.55

7.60

7.65

Sep-11Mar-12Sep-12Mar-13Sep-13Mar-14EUR/HRK (eop)

0123456


Croatia



HRK rate and yield curve (%)*


Forecast



EUR/HRK 7.61 7.60 7.57 7.48 7.52

Cons. 7.56 7.55 7.55 7.52

USD/HRK 5.70 5.85 5.78 5.80 5.88


Financial market outlookAlthough EUR/HRK remains rather stable, lower inflows of foreign currency and foreign deleveraging in all domestic sectors except the government are gen-erating constant depreciation pressures on the domestic currency. Therefore, with the increased FX inflow from tourism, even the usual seasonal appreciation pressures on HRK were less pronounced. During the peak tourist season from the middle of July to the middle of August the average middle rate was quite high, at 7.51 kuna per euro. Towards the end of Q3, depreciation pressures on HRK became more pronounced with EUR/HRK approaching the 7.60 level. Through to the end of the year EUR/HRK should remain under pressure due to lower inflows of foreign capital, more stringent regulatory requirements (regard-ing banking provisions for NPLs) and the usual increase in demand for EUR. In addition, trends in goods trade (decline in goods exports and increased goods imports) also influence exchange rate developments. A certain drift from these movements may come in the form of local EUR-linked bond issuances. The higher budget deficit than the government expected confirms the need for the govern-ment to reach out to the capital markets by placing an issue in the local and/or international market. While a EUR-linked domestic issue might alleviate de-preciation pressures on HRK, tapping the foreign markets would have a neutral effect in the short term as the conversion of foreign currency would be probably carried out through the CNB, or could even prompt mild HRK weakening amidst increased demand for EUR from institutional investors (for Eurobond purchases on the secondary market). On the other hand, possible inflows of foreign capital due to investments and/or privatisation might cause temporary strengthening of HRK. In addition, deleveraging by domestic sectors is slowing down. As regards the bond markets, higher yields on the core markets also influenced the increase in yields on Croatian Eurobonds and to lesser extent of local ones. On the local bond market, trading volumes are rather low especially in the HRK segment and demand is quite strong, which prevents a stronger reaction by the domestic mar-ket to the increase in Eurobond yields. However, in the case of a more substantial increase in Eurobond yields, we also expect a more significant reaction on the local market. The recent yield increase results in more uncertainty regarding expected bond issues. A Eurobond issue would make more sense in view of the limited liquidity on the domestic market (although its level is stable at around HRK 4 bn), but the momentum is far from ideal.

Zrinka Zivkovic-Matijevic



Key rate 6.00 6.00 6.00 6.00 6.00

Consensus 6.00 6.00 6.00 6.00

1 month2 0.65 1.30 1.45 2.20 2.80

3 month2 1.38 2.00 2.45 3.00 3.30

6 month2 1.80 2.70 2.80 3.45 3.50


Yield forecasts


2y T-bond2 3.15 3.50 3.50 3.60 3.70


5y T-bond2 4.46 4.40 4.50 4.50 4.6010y T-bond2 4.88 5.50 5.60 5.60 5.60

Cons. n.a. n.a. n.a. n.a.1 5:00 p.m. (CET) 2 Ask yieldSource: Bloomberg, Raiffeisen RESEARCH

24 4th quarter 2013

Romania

-10

-8

-6

-4

-2

0

2009

2010

2011

2012

2013

e

2014

f

2015

f


Current account balance (% of GDP)

Real GDP (% yoy)


Ongoing recovery with agriculture inflating growth

Budget and current account balance


Forecast

Forecast

-8-6-4-202468

2009

2010

2011

2012

2013

e

2014

f

2015

f



2009 2010 2011 2012 2013e 2014f 2015f


Real GDP (% yoy) -6.6 -1.1 2.2 0.7 2.5 2.0 2.5












EUR/RON (avg) 4.24 4.21 4.24 4.46 4.43 4.48 4.45

USD/RON (avg) 3.04 3.17 3.04 3.47 3.38 3.45 3.42


Favourable performance in industry and exports, supported to a large extent by the automotive sector Modest recovery expected in the still-depressed domestic demand component for the remainder of the year Central bank to move decisively towards a historically low interest rate environment, in line with other CEE central banks Global portfolio rebalancing as risk factor for local financial markets with the shorter end of the bond curve better protected

Economic outlookIndustry and net exports remained the key drivers of GDP growth in Q2 (+0.5% qoq), while domestic demand was roughly flat. The mild contraction in invest-ment activity was offset by a marginal increase in consumption. The fall in im-ports (especially oil and natural gas) resulted in a close to zero balance for foreign trade in goods and services in Q2 and a current account surplus (for the first time since 1990). Similar to Q1, the contraction in imports was a driver for GDP growth in Q2. However, flat dynamics in real GDP excluding agriculture suggests that Q2 might have been the worst quarter since end-2011.

We expect the pace of economic recovery to gradually accelerate in H2 on the back of improving external demand, a more accommodative monetary policy environment and the increasing absorption of EU funds. Real GDP excluding agriculture should expand at a rate of 0.3% qoq in Q3, while the outstanding performance of the agricultural sector should temporarily boost GDP dynamics in Q3 and Q4. Overall, the annual growth rate for real GDP should surge to 3.5%-4.0% in Q3. For the full year, this year’s very good harvest should help GDP growth to climb to 2.5% yoy – with risks recently becoming tilted to the upside. However, the relatively high nominal figure whitewashes the sustainability of the ongoing economic recovery as it is inflated by temporary factors such as agricul-tural performance which is currently benefiting from the low 2012 statistical base (bad harvest). As we have highlighted, we see real GDP dynamics excluding agriculture (1.4%) as a better proxy for underlying trends in economic activity.

The government succeeded in keeping the budget deficit low in January-July (1.0% of GDP, cash basis), but it had to cut investment spending for 2013. The new precautionary SBA agreement with the IMF (expected to be enforced in October) and the EU fiscal surveillance framework continue to be constraints

254th quarter 2013

Romania

4.3

4.4

4.5

4.6

Sep-11Mar-12Sep-12Mar-13Sep-13Mar-14EUR/RON (eop)



2.53.03.54.04.55.05.56.0


.

RON rate and yield curve (%)*


Fore

cast



EUR/RON 4.48 4.50 4.45 4.50 4.50

Cons. 4.42 4.40 4.40 4.40

USD/RON 3.35 3.46 3.40 3.49 3.52


for the government coalition to avoid major fiscal slippages. While the existing targets might be missed marginally, the public budget deficit is likely to remain below 3% this year.

Financial market outlookAs expected, the disinflation process accelerated over the summer months with annual consumer price inflation falling from 5.4% yoy in June to 3.7% yoy in August. Favourable supply side shocks (easing of volatile food prices, VAT cut for bread products from 24% to 9%) and statistical base effects should help inflation to fall towards 2.3% yoy in September and even to decrease temporary to below 2.0% yoy in Q1 2014. More importantly, weak consumption demand is keeping underlying price pressures subdued which bodes well for inflationary expecta-tions. In this context, we see room for the Romanian central bank (BNR) to con-tinue relaxing its monetary policy stance in Q4 2013 and Q1 2014, especially by reducing the key interest rate and the ratio for RON minimum reserve require-ments. We now see chances for the rate-cutting cycle to bottom out at 3.5% in Q1 2014 provided that no risks materialise on local and external fronts in the next couple of months. Given our earlier 4.0% forecast, this means a more generous easing of the monetary reins. Against this backdrop, money market rates should be sent south, with a beneficial impact on the short end of the yield curve (2y-5y), but the expected tapering of quantitative easing by the FED should impede developments on long-term yields (7y-10y) and counteract their suggested de-cline. As a result, we expect the yield curve to reflect some bull steepening in the months ahead and to remain well anchored in subsequent quarters.

Key risks to the above baseline scenario are an increase in risk aversion towards EM assets in general as a result of the expected increase in long-term core mar-ket yields, but also potential turbulence on the local political front. Prices for RON T-bonds and the exchange rate are now more sensitive to sudden shifts in global sentiment than they were one year ago, given the increased holdings of non-residents in local government securities. This, in turn, raises constraints for the BNR in terms of further and deeper rate reductions as well. Fortunately, even in the case of souring market conditions, portfolio outflows are technically somewhat limited in the coming quarters as redemptions to non-residents are low. In such an environment, the central bank should be allowed to resort to its FX reserves (high enough at the moment) to avoid major slippages of the leu versus the euro. Finally, our baseline assumes that the USL political alliance will survive in the quarters to come. However, developments in politics are worth monitoring closely, especially in light of the presidential elections in 2014.

Nicolae Covrig



Key rate 4.50 3.75 3.50 3.50 3.50

Consensus 4.13 4.13 4.13 4.13

1 month2 3.00 2.85 2.70 2.80 2.85

3 month2 3.19 3.00 2.90 2.90 2.95

6 month2 3.33 2.80 2.75 2.75 2.95


Yield forecasts


2y T-bond2 4.43 3.95 3.85 3.90 3.90


5y T-bond2 4.70 4.45 4.40 4.40 4.4010y T-bond2 5.05 5.00 5.00 5.10 5.20


26 4th quarter 2013

-20

-15

-10

-5

0

5

10

-8

-6

-4

-2

0

2

4

2009

2010

2011

2012

2013

e

2014

f

2015

f


Political uncertainty hampers economic growth

Bulgaria

14

15

16

17

18

19

20-6

-5

-4

-3

-2

-1

0

2009

2010

2011

2012

2013

e

2014

f

2015

f


Real GDP (% yoy)




Forecast

Forecast


2009 2010 2011 2012 2013e 2014f 2015f


Real GDP (% yoy) -5.5 0.4 1.8 0.8 0.5 2.0 3.5









Current account balance (% of GDP) -8.9 -1.5 0.3 -0.7 1.0 0.5 -0.8



EUR/BGN (avg) 1.96 1.96 1.96 1.96 1.96 1.96 1.96

USD/BGN (avg) 1.40 1.47 1.41 1.52 1.49 1.50 1.50

Source: Thomson Reuters, wiiw, Raiffeisen RESEARCH

In Q2 2013, real GDP came in at -0.2% yoy, turning negative for the first time since Q1 2010. This period was marked by street demonstrations, followed by the resignation of the GERB government. Political uncertainty led to precaution-ary behaviour by firms and households. In H1, investment saw a strong decline of 13% yoy, and a similar development is expected through to the end of the year. Nevertheless, the H1 data was broadly in line with our expectations, and we maintain our GDP forecast for growth of 0.5% for 2013. However, slightly slower growth is now projected for 2014: our forecast was lowered to 2.0%, as protests against the new Socialist-led government have continued in the last few months and early parliamentary elections are more likely. The expected Eurozone recovery should make a positive contribution to GDP growth in 2014 via the exports and financial inflows channels. A slight rebound in investment of 3.5% in 2014 is forecast on the back of increasing export revenues and a posi-tive contribution from the state budget. With regard to the former, it should be noted that export dynamics in H1 exceeded expectations, expanding by 8% yoy despite the still feeble external economic conditions. In 2013 and 2014, exports are expected to advance by 4.9% and 5.8%, boosted by the acceleration in the EU recovery. Mainly due to the decline in investment, import growth remained moderate in H1 and for the whole year imports are forecast to grow by 2.2%. In addition to the increasing inflow of current transfers and improving services exports, these dynamics will allow for an improvement in the C/A balance to a positive balance of up to 1% of GDP in 2013 and 2014.As for public finances, a revision of the 2013 budget was passed by Parliament in August, widening the annual deficit by BGN 500 mn. This is expected to help cover increased social spending and reimbursement of payments to the private sector. The revised figures confirm our forecast of a budget gap of around 2.1% of GDP for 2013.

Hristiana Vidinova

Economic downturn in Q2, broadly in line with expectations Exports show strong dynamics in H1 and are expected to drive GDP growth in 2014 Weak domestic demand in 2013, moderate rebound forecast for next year Political tension and street protests have intensified, early elections likely

274th quarter 2013

Does the reshuffled government really have reform authority?

Serbia

Reshuffled government preparing for public sector/structural reforms IMF negotiations, Eurobond placement and Telekom privatisation on the agenda Despite falling inflation, monetary policy easing blocked by current fiscal risks Exports volumes peaked, thanks to FIAT exports

0816243240485664-8

-7-6-5-4-3-2-10

2009

2010

2011

2012

2013

e

2014

f

2015

f


Real GDP (% yoy)




Forecast

Forecast

-14-11-8-5-214710

-5-4-3-2-10123

2009

2010

2011

2012

2013

e

2014

f

2015

f



2009 2010 2011 2012 2013e 2014f 2015f


Real GDP (% yoy) -3.5 1.0 1.6 -1.7 1.5 2.0 3.0












EUR/RSD (avg) 93.94 102.95 101.97 113.04 113.22 113.80 114.40

USD/RSD (avg) 67.38 77.61 73.26 87.92 86.43 87.54 88.00


Although export volumes reached a five-year peak, the recovery is concentrated in just a few industries (car, chemicals, oil), whereas other sectors show bleak data. We expect that this will change from 2014 given the comfortable FDI inflows in 2013 and a number of done deals, i.e. especially with United Arab Emirates (IT investments of USD 4 bn, production of spare parts for the aviation industry for Boeing and Airbus, purchase of eight agricultural companies, UAE Royal holding is considering opening a bank, etc.). Altogether, this will support GDP growth of 1.5% yoy in 2013. We reckon the C/A gap will fall in 2013 (5.9%), thanks to good exports and remittances from abroad, hampering any larger EUR/RSD weakening. Despite falling inflation (July 2013: 2.0% ytd), the central bank will decide on future key rate cuts cautiously, in light of the per-sistently high fiscal risks, developments on the geopolitical scene and EUR/RSD volatilities (due to investors’ repositioning in local debt portfolios).The Serbian Progressive Party (SNS) and the Socialist Party of Serbia (SPS) decided to continue without United Region of Serbia (URS). One novelty is also the nomination of SNS experts (as opposed to party officials) in three important fields (finance, economy and agriculture), implicitly signalling that the senior coalition partner supports deep public sector and structural reforms. The goals of the new finance minister are: stimulating employment by cutting wage taxation, cuts in unnecessary expenditures, and pension system reform. Still, the social policy framework of SPS and the Party of United Pensioners of Serbia might result in some delays in the reform measures. Given this, snap parliamentary elections might be on the table again early next year, especially since the deep reforms are an IMF requirement for the new SBA deal. The Second Budget Law 2013 revision is looming (potentially raising the budget deficit to RSD 200 bn vs. the planned RSD 178 bn), along with delivery of the Budget Law 2014, which envis-ages a budget deficit cut to approx. 4% of GDP.

Ljiljana Grubic

28 4th quarter 2013

-1.0

0.5

2.0

3.5

5.0

6.5

8.0-12

-10

-8

-6

-4

-2

0

2009

2010

2011

2012

2013

e

2014

f

2015

f


Real GDP (% yoy)




Forecast

Forecast

-6

-4

-2

0

2

4

6

2009

2010

2011

2012

2013

e

2014

f

2015

f



2009 2010 2011 2012 2013e 2014f 2015f


Real GDP (% yoy) -2.8 0.7 1.0 -1.1 0.5 1.5 3.5




Producer prices (avg, % yoy) -3.2 0.9 3.7 1.9 -1.0 2.3 2.4

Consumer prices (avg, % yoy) -0.4 2.1 3.7 2.1 1.0 2.5 2.5







EUR/BAM (avg) 1.96 1.96 1.96 1.96 1.96 1.96 1.96

USD/BAM (avg) 1.40 1.47 1.41 1.52 1.49 1.50 1.50


Our baseline growth estimate for Bosnia and Herzegovina remained unchanged, based on the data available for the third quarter, which reflect more robust out-comes in export-oriented sectors. The positive economic momentum in exports and industry remained strong over the first 7 months of 2013, with respectable growth of 6.9% yoy and 8.5% yoy, respectively. However, in our baseline sce-nario the outlook for exports and industry still features a downward correction in Q3 and Q4. At the same time, there are no signs of improvement in the depressed labour market (27.5% unemployment in H1 2013) nor in disposable income and retail sales, and therefore in private consumption, which we expect to decline by 0.5% in real terms. Furthermore, political leaders have shown no inclination to tackle the political crisis, and it is highly probable that a dead-lock will remain until the next general elections (October 2014). Nevertheless, despite the dead-lock, the political authorities are still strongly committed to fulfilling the IMF con-ditions from the Stand-By Agreement. Therefore, fiscal stability will be preserved with an estimated budget deficit of 1.5% of GDP. Accordingly, our forecast for negative annual readings in government consumption remained unchanged at -0.3% yoy. Gross fixed capital formation will also remain in negative territory for the second year in row, with an estimated real growth rate of -2% yoy. Hence, the only category which will generate positive economic growth in 2013 is exports of goods and services, but we would like to wait and see the Q3 data for any upward revision of our forecast. Consequently, our baseline scenario for 2013 still calls for more sluggish economic expansion mirrored by real GDP growth in a range of 0.2%-0.5% yoy. In 2014, we expect to see much stronger economic growth due to start of the electricity sector investment cycle by the public utility company Elektroprivreda BiH and continuation of infrastructure projects (Corridor VC). Therefore, the main driver of economic growth should be gross fixed capital formation (+12% yoy), along with exports.

Ivona Zametica

Glimmers of hope, as upturn in exports and industry continues

Bosnia and Herzegovina

Our baseline growth estimate of 0.2% yoy remains unchanged, but with some upside potential by the end of the year Despite the political crisis, the IMF conditions are being fulfilled Stronger economic recovery expected in 2014 Investment cycles in energy and infrastructure sectors

294th quarter 2013

Winds of change

Albania

Economy slowly growing, supported by external demand and fiscal stimulus New government approved, headed by new Prime Minister Edi Rama Receiving EU candidacy status is one of the main priorities Trans Adriatic Pipeline (TAP) to meet the country’s energy needs and increase the level of FDI

456789101112-16

-14-12-10

-8-6-4-20

2009

2010

2011

2012

2013

e

2014

f

2015

fCurrent account (% of GDP)

Net FDI (% of GDP, r.h.s.)

Real GDP (% yoy)




Forecast

0

2

4

6

8

10

2009

2010

2011

2012

2013

e

2014

f

2015

f



2009 2010 2011 2012 2013e 2014f 2015f


Real GDP (% yoy) 3.3 3.9 3.1 1.6 2.0 3.0 3.5

Industrial output (% yoy) 1.0 2.0 9.6 2.8 2.4 3.0 3.0











EUR/ALL (avg) 132.1 137.8 140.3 139.0 139.7 138.3 138.0

USD/ALL (avg) 94.7 103.9 100.8 108.2 106.6 106.4 106.2


The Albanian economy continued on its path of sub-average growth in Q1 2013, expanding at a rate of just 1.7% yoy, supported by industry, agriculture and ser-vices, while construction shrunk. The structure of the economy remained oriented towards external demand as has been the case in recent years. Domestic demand has yet to recover, despite efforts by the Bank of Albania to lower the base interest rate to a new record low level of 3.5% in July of this year. Lending to the economy in H1 2013 was at the lowest level in recent years and has remained almost flat since December 2012. Non-performing loans continue to be a concern, having advanced to 24.2% by the end of May (up from 13.6% at end-2010). Fiscal stimulus in the pre-election period should be reflected in higher economic growth in Q2. Nevertheless, the general elections of 23 June increased government ex-penditures by 10.8% yoy, while revenues dropped by 2.6% yoy. Nonetheless, the budget deficit is expected to remain within the target of 3.4% as the privatisations of some hydro power plants are expected to balance the situation.The new centre-left government of the coalition of the Socialist Party (SP) and the Socialist Movement for Integration (LSI) was approved by the Albanian Parlia-ment in a vote on 15 September. Of the 140 members of parliament, 82 voted for the new ministers under the leadership of Prime Minister Edi Rama.The government programme consists of three main pillars in the next four years: combating corruption, reforming the judiciary and boosting domestic production. However, another one of the main goals is progress in the field of EU integra-tion. A slight revival in economic activity is expected in 2014 as the country is expected to gain EU candidacy status. The Trans Adriatic Pipeline (TAP) Project is expected to bring in around EUR 400 mn to the economy in the next four years. Furthermore, cooperation with the IMF should be intensified, not necessarily to start a new programme, but to get support in avoiding a new crisis.

Valbona Gjeka

Forecast

30 4th quarter 2013

Avoid the pitfalls on the way

Kosovo

Consumer confidence has returned, financed by remittances Elections push the government to spend more on infrastructure Growing exports, domestic agricultural output and low oil import prices reduce the trade deficit Telecom privatisations on the brink of failure

0

5

10

15

20

25-5

-4

-3

-2

-1

0

2009

2010

2011

2012

2013

e

2014

f

2015

f


Real GDP (% yoy)




Forecast

Forecast

0

1

2

3

4

5

6

2009

2010

2011

2012

2013

e

2014

f

2015

f

Real GDP (% yoy)


2009 2010 2011 2012 2013e 2014f 2015f


Real GDP (% yoy) 3.5 3.2 4.5 3.0 3.0 3.0 4.0



Consumer prices (avg, % yoy) -2.4 3.5 7.3 2.5 2.4 1.5 2.5







EUR/USD (avg)* 1.39 1.33 1.39 1.29 1.31 1.30 1.30

* EUR official currency in KosovoSource: Thomson Reuters, Raiffeisen RESEARCH

A relatively productive summer and improving exports suggest that the low point in the economic cycle has been reached and passed, and that the economy is now moving forward on an expansive trend, in line with most European economies.Public investments have increased, given the seasonality combined with the an-nouncement of local elections in November. Private consumption is also moving ahead at a confident level, financed by the summer inflows of remittances. How-ever, both will flatten out in the coming months. Capital formation is at a constant low growth level, and depending on the industry it will stay low. In particular, retailers and petrol stations are facing tough market conditions, leading to acqui-sitions of small businesses by larger ones. Next year, real estate and construction companies will face a similar fate, due to a perceived oversupply compared to the limited purchasing power.The semi-annual export data are considerably more satisfying than last year, having grown by a tenth in the period. Improving agricultural output will further reduce the trade deficit, as raw and prepared foods lead the imports table. The trade deficit is falling even further, given the stagnation in imports, and low oil prices have also contributed significantly to this decline.There is a risk that the privatisation of the public-owned telecom will fail in the final stage, due to repeated delays in the date of contract signing and pay-ment transaction. Lately, the winning consortium has indicated a renegotiation of the price for the purchase. The IMF has ordered the government not to start building the second highway toward Macedonia, before the telecom agreement is reached, because the highway is financed by the government budget and not through project finance. The risk of the privatisation transaction failing has moved the government to withdraw its position on international markets, which is funded by previous privatisations.

Fisnik Latifi

314th quarter 2013

Moderate growth ahead

Belarus

-4-202468

1012

2009

2010

2011

2012

2013

e

2014

f

2015

f


0246810121416-16

-14-12-10

-8-6-4-20

2009

2010

2011

2012

2013

2014

e

2015

fCurrent account (% of GDP)Net FDI (% of GDP, r.h.s.)

Real GDP (% yoy)



Source: Statistical Committee of the RB, Raiffeisen RESEARCH

Forecast

Forecast


2009 2010 2011 2012 2013e 2014f 2015f


Real GDP (% yoy) 0.2 7.6 5.3 1.5 2.0 2.0 3.0







General budget balance (% of GDP) -0.7 -2.6 2.4 0.5 0.0 0.0 0.0





EUR/BYR (avg) 3,894 3,951 6,900 10,700 12,100 14,300 16,100

USD/BYR (avg) 2,793 2,979 4,975 8,337 9,200 11,000 12,400


While economic growth in 2012 was underpinned by a strong expansion in ex-ports (thanks to the solvents and thinners re-export scheme to Russia), this year’s GDP growth is driven by household demand, which is supported by continued wage increases (20.5% yoy in Jan-Jul), in excess of productivity growth (2.5% yoy). On the other hand, the continued slump in industrial output and the sharp contraction in exports are making a negative contribution to economic growth and leading to a deficit on the external trade balance. Exports are suffering from the diminishing price competitiveness of Belarusian investment goods and a slowdown in Russian economic growth. The trade balance is showing slightly positive figures (USD 0.2 bn in Jan-Jul 2013), while the balance of trade in goods is substantially negative at USD 1.5 bn. We expect GDP growth to recover to 2% in 2013 and 2014, with only a slight improvement (3% yoy) in 2015. Inflation has calmed down to less than 1% per month (cumulated 8.2% in Jan-Jul), but remains the highest among the CIS countries.

Tensions in the FX rates are exacerbated by the ongoing C/A deficit widening (USD 3.1 bn or 9.3% of GDP in H1 2013) and uncertain funding sources to cover significant external debt repayments. The Belarusian rouble has returned to a depreciation path, losing more than 5% of its value versus USD and EUR since early 2013. Moreover, further BYR weakening may be triggered by in-creasing imports of consumer goods amidst higher wages, devaluation of the Russian rouble and net FX purchases by households. FX reserves slightly de-creased in August to USD 7.7 bn after a long period of stabilisation at USD 8 bn since late 2011 and are forecasted to decline further. Taking into account the above-mentioned, we revised up our EUR/BYR forecast for 2014, with a more negative outlook for the Belarusian currency.

Mariya Keda

Household consumption still main growth driver, industry performs negatively, only moderate GDP growth for the next years Exports of Belarusian goods react to slowing economic growth in Russia Inflation down, but comparatively high in the region BYR under pressure amidst C/A widening and net FX purchases by households, forecasts revised up to more depreciation

32 4th quarter 2013

Russia

-7

-5

-3

-1

1

3

5

2009

2010

2011

2012

2013

e

2014

f

2015

f

General budget balance (% of GDP)Current account balance (% of GDP)

Real GDP (% yoy)




Forecast

-10

-5

0

5

10

2009

2010

2011

2012

2013

e

2014

f

2015

f



2009 2010 2011 2012 2013e 2014f 2015f


Real GDP (% yoy) -7.8 4.5 4.3 3.4 2.0 2.0 2.5



Average gross wages (% yoy) 7.8 12.4 11.5 14.8 8.0 8.0 7.0




General budget balance (% of GDP) -6.3 -3.5 1.6 0.4 -0.5 -0.2 -0.6


Current account balance (% of GDP) 4.1 4.4 5.1 3.7 2.8 2.0 1.1



EUR/RUB (avg) 44.1 40.4 40.9 40.0 42.0 43.0 44.1

USD/RUB (avg) 31.7 30.4 29.4 30.8 32.0 33.0 33.9

Basket/RUB (avg) 37.3 34.9 34.6 34.9 36.5 37.5 38.5


Economic outlookThe weak performance by key GDP components in H1 prompted us to recently downgrade our 2013 GDP forecast from 3% to 2%. In particular, the Q2 data suggest a more significant decline in investments, continued stagnation in indus-trial production and slower retail sales growth. These disappointing results trans-lated into a considerable deceleration of GDP growth to only 1.2% in Q2 vs. 1.6% in Q1, which was below our expectations. On the upside, in recent months the CPI has decreased from more than 7% to only 6.5% in August. With regard to the current disinflationary tendencies, we expect yoy inflation to decrease to about 6% by year-end, coinciding with the upper boundary of the CBR target. According to our estimates, the recent decision to freeze regulated prices for gas, electricity and railways in 2014 could lower headline inflation by at least 0.4-0.5 pp (in line with the estimate of MinEc), which leaves room for more sizeable rate cuts in the medium term. However, according to the rhetoric of E. Nabiullina, rate cuts are very unlikely in the coming months. The government’s response to slower GDP growth was reflected in the recently announced economic stimulus package, which is focused on measures to accelerate investment growth and to reverse capital flows back into the country. This support programme includes plans to stimulate corporate lending (incl. SME lending), invest part of the NWF in state infrastructure projects and attract private investments by improving the business climate via the implementation of a special package of institutional and legislation measures (9 Road maps).In politics, the recent regional elections demonstrated a change in the approach by the authorities. More competition was allowed, including forces of the op-position, which were barred from taking part before. This was showcased in Moscow, where Mr Navalny – an outspoken critic of President Putin – took almost one third of votes. However, as in most regions, a candidate associated with the

Economic stimulus package on the way

Economic slowdown continues Inflation on a medium-term downward trend Government stimulus package to support economic activity Speculative pressure on the rouble partially curbed by the CBR

Forecast

334th quarter 2013

5.5

6.0

6.5

7.0

7.5

8.0


29

30

31

32

33

34


USD/RUB (eop)



RUB rate and yield curve (%)*


Russia



EUR/RUB 43.02 43.0 42.5 42.8 42.6

Cons. 41.7 41.6 41.9 41.7

USD/RUB 32.21 33.0 32.5 33.2 33.3

Cons. 32.6 32.6 32.9 32.8RUB basket 37.07 37.5 37.0 37.5 37.5


Forecast

United Russia Party/President Putin won the vote – in Moscow this was incum-bent mayor Mr Sobyanin. Also, it is still too early to draw any real conclusions as to what this means at the federal level.

Financial market outlookNegative economic conditions and the general sell-off of EM currencies led to se-rious RUB depreciation, which amounted to 5% in June-Aug. High oil prices have not been able to prevent this weakening of the rouble. Even in light of the lower rate of import growth with deteriorating industrial production and capital invest-ments and weak demand for investment goods, the pace of import deceleration is not very high and in our view cannot significantly improve the trade balance. The dynamics of RUB have become more dependent on capital flows rather than on current account conditions. In June-Sept, CBR shifted up the boundaries of the FX band 12 times, by a total of 60 kopecks. Recently, the CBR reduced the threshold of accumulated interventions, after reaching which the boundaries of the target bi-currency band (now 32.25-39.25 roubles) are shifted by 5 kopecks, from USD 450 mn to USD 400 mn. In event of further weakening of the rouble, this measure could increase the frequency of corridor shifts resulting in higher volatility in the short term, but preventing downward speculative pressure in the medium term.In the first half of Q3 after a short-lived recovery from the June sell-off, OFZs were under selling pressure from non-resident holders (HF), who were disappointed by their bet on the CBR’s repo rate cut, which failed to materialise. Both negative sentiment on external markets and rouble depreciation (up to 10% in terms of the bi-currency basket since the start of the year) led RM funds away from OFZ. As a result, yields on OFZ increased by 40bp with 10-year paper peaking at a YTM of 7.8%; a further upward move was prevented by support from local investors who were attracted by the higher carry over o/n CBR REPO rates. In the second half of Q3, the market situation reversed with sharp rouble appreciation, and US T-bonds found some balance, helping OFZ to recover (yields on 10-year paper dropped to YTM 7.3%). Given unexpected delay in QE tapering we think market will be more volatile in Q4 with issue over US debt ceiling being the main factor of uncertainty. In our view, the CPI will continue descending (to 6.0% yoy by end-Q4), which will trigger expectations of a CBR rate cut in Q4 2013 – Q1 2014, bringing HF back to OFZ. However, the yield reduction is limited by the large supply of long-term OFZ from Minfin and a liquidity squeeze on the local market (with money market rates exceeding 6.5%). We expect the OFZ curve to flatten by 20-25bp in terms of the 10-2y spread.

Maria Pomelnikova, Denis Poryvay



Key rate 5.50 5.25 5.25 5.25 5.25

Cons.2 7.75 7.63 7.50 7.38

1 month 6.56 6.70 6.50 6.65 6.75

3 month 6.78 7.10 6.95 7.10 7.20

6 month 7.24 7.40 7.15 7.35 7.451 5:00 p.m. (CET) 2 refers to refinancing rate of currently 8.25%Source: Bloomberg, Raiffeisen RESEARCH

Yield forecasts


2y T-bond2 6.20 6.20 6.00 6.25 6.00


5y T-bond2 6.60 6.60 6.30 6.60 6.4010y T-bond2 7.40 7.20 7.00 7.30 7.15


34 4th quarter 2013

-25-20-15-10

-505

1015

2009

2010

2011

2012

2013

e

2014

f

2015

f


15

20

25

30

35

40-10

-8

-6

-4

-2

0

2009

2010

2011

2012

2013

2014

e

2015

f


Real GDP (% yoy)

Source: State Statistics Committee of Ukraine, Raiffeisen RESEARCH

Milking both cows is no longer an option


Source: National Bank of Ukraine, Raiffeisen RESEARCH

Forecast

Forecast


2009 2010 2011 2012 2013e 2014f 2015f


Real GDP (% yoy) -14.8 4.2 5.2 0.2 1.0 1.5 2.5




Producer prices (avg, % yoy) 6.6 20.9 19.0 3.6 -1.0 8.0 8.0

Consumer prices (avg, % yoy) 15.9 9.4 8.0 0.6 -0.2 5.0 7.5

Consumer prices (eop, % yoy) 12.3 9.1 4.6 -0.2 1.0 6.0 9.0






EUR/UAH (avg) 11.2 10.5 11.1 10.4 10.7 10.9 12.0

USD/UAH (avg) 8.0 7.9 8.0 8.1 8.1 8.4 9.2


Economic outlookThe Ukrainian economy has been suffering from a recession for a year now, with GDP contracting by 1.3% yoy in Q2 2013, amid chronically weak external demand and a lack of domestic economic stimulus. However, a bountiful harvest and the positive statistical base effect will push GDP growth figures back to the green in H2 – to reach 0.5-1.0% yoy for the whole year. Given the sluggish global economic recovery and no room for expansionary domestic policies (in light of policymakers’ strong focus on exchange rate stability), we expect only modest pick-up in growth rates next year to 1.0-1.5%. Inflation is still no worry with a zero yoy growth rate at the moment and prospects of only moderate ac-celeration to 5-6% next year, conditional on a resurgence in food prices. The bal-ance of payments posted a USD 1.8 bn surplus in Jan-Jul 2013, mostly attributed to slump in energy imports, the introduction of import restrictions and robust debt capital inflows. We expect the surplus on the external accounts to nearly vanish by year-end, with the seasonal hike in energy imports and tightening access to the global debt markets. Budget revenue performance in H1 2013 was damp-ened by the looming recession and the introduction of import restrictions, while easing access to financing and the improvement in Naftogas and Pension Fund finances has reduced the pressure on the fiscal accounts. In our view, the general government deficit will decrease slightly this year (from 5.3% of GDP in 2012 to 4.0-4.5%) with the public debt-to-GDP ratio hovering below the level of 40%.On the political front, the deterioration in political relations with Russia has been in the spotlight for the last few weeks. The upcoming EU summit within the frame-work of the “Eastern Partnership” in November forces the authorities to make a decision on the association and free trade agreement with the EU, which Mos-cow fiercely opposes, preferring to see Ukraine in its customs union with Kazakh-stan and Belarus. The two options are mutually exclusive. We see the European

Economy remains in recession, amidst weak external demand and tight domestic policies Time to make a geopolitical choice: EU or Russia Political frictions with Russia underline economic vulnerabilities Major economic fallout is not imminent, but external support is a must at some stage

Ukraine

354th quarter 2013

7.95

8.00

8.05

8.10

8.15

8.20

8.25

Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14USD/UAH (eop)

-505

1015202530

2009

2010

2011

2012

2013

e

2014

f

2015

f

Unemployment rate (avg, %)Consumer prices (avg, % yoy)

0

2

4

6

8

10-10

-8

-6

-4

-2

0

2009

2010

2011

2012

2013

2014

e

2015

f




Inflation outlook


Source: State Statistics Committee of Ukraine, Raiffeisen RESEARCH

Source: National Bank of Ukraine, Raiffeisen RESEARCH

Forecast

Forecast

Ukraine



EUR/UAH 10.94 10.7 10.7 10.7 10.8

Cons. 11.0 11.1 11.1 11.2

USD/UAH 8.19 8.2 8.2 8.3 8.4


option for Ukraine as currently being more likely (interest of elites in defending independence, recent rhetoric of politicians and passing of required laws; a solu-tion for jailed former PM Julia Timoshenko might be found). In this case, further tensions with Russia are likely to impact on the economy and Ukraine would require an offsetting effect from (then more likely) support by the IMF, WB and the EU. However, we are not yet sure that the deal with the EU is done. On the EU side, the desire to sign the deal with Ukraine is extremely high. But we do not rule out a last minute change of mind by the Ukrainian authorities if Russia is able to find convincing arguments – for example, providing large-scale financial support to Ukraine, while also guaranteeing a substantial degree of economic and political independence for the incumbent administration.

Financial market outlookUkraine managed to capitalise on a sharp improvement in sentiment for EM assets in early 2013, attracting nearly USD 6 bn at the global debt markets in Jan-May via sovereign and corporate Eurobond placements. In addition, the Min-istry of Finance raised USD 2.4 bn of FX at the local debt market, mostly tapping the excess FX liquidity of state-owned banks. Correspondingly, domestic depre-ciation expectations tapered off, alleviating pressure on the battered currency. However, the bonanza came to an end with the sharp repricing of EM assets in the wake of the inevitable QE reversal by the Fed. Naturally, Ukraine – as one of the weakest credits in the EM universe – suffered the most with bond yields rising by 300-400 bp since May. The sharp adjustment in yields once again raised questions about the sustainability of the exchange rate peg and the probability of a sovereign credit event. In particular, FX reserves slid to 7-year low of USD 21.7 bn (equivalent to 2.6 months of imports) at end-August amid large-scale external debt redemptions. Moreover, the latest trade feud with Russia (destina-tion for 25% of Ukrainian exports) again highlights the looming vulnerabilities of the Ukrainian economy.

Nevertheless, we do not expect sharp exchange rate adjustment in the near future, given the currently very high political stakes in the game. The authorities will try to limit exchange rate fluctuations by supporting the hryvnia with FX in-terventions, issuing FX debt and introducing new administrative restrictions on FX market operations if necessary. As a result, we expect further drawdown of FX reserves (to USD 18-19 bn by end-2013), while the anticipated increase in US bond yields will put upward pressure on Ukraine’s borrowing costs. Therefore, we see no chance for ‘muddling through’ policies to survive until the presidential elections in early 2015, and sooner or later Ukraine will have to draw on exter-nal support from either from IMF or from Russia. However, while the economy is not yet doomed to crisis, given the potential availability of back-stop options, Ukraine remains highly exposed to the tail risk in the case of major economic and/or political shock.

Dmytro Sologub

Forecast

36 4th quarter 2013

Turkey

-12

-10

-8

-6

-4

-2

0

2009

2010

2011

2012

2013

2014

e

2015

f

General budget balance (% of GDP)Current account balance (% of GDP)

-12-8-4048

1216

2009

2010

2011

2012

2013

e

2014

f

2015

f


Economic outlookWhile the Emerging Market (EM) sell-off hit local financial markets much harder than other CEE markets, Turkey’s real economy weathered the series of adverse events in H1 2013 better than feared. Following the positive surprise in Q1 (1.5% qoq and 2.9% yoy), economic activity accelerated in Q2 to 2.1% qoq, gaining momentum for the second quarter in a row. In annual terms, GDP inched up by 4.4% yoy, remarkably exceeding the 3.6% consensus call. Still, despite the revision of Q1 2013 GDP growth from 3.0% to 2.9% yoy, Turkey’s economy performed stronger than expected (3.7% yoy in H1 2013). The composition of growth, however, does not paint a rosy picture. We would point to the strong contribution from inventory building, which is not a sustainable growth driver. Following seven quarters in which this component subtracted from GDP growth, it contributed 2.3 pp in Q2. Also, the continued weakness in private investment – declining by 2.0% yoy for the sixth straight quarter (-0.5 pp) – is a concern for the longer-term GDP outlook. As we anticipated, the Q2 rebound continued to be driven by private consumption demand, since rebalancing towards exports already hit its structural limits last year. While the negative impact from net ex-ports – for the second consecutive quarter – was expected and knocked 3 pp off economic growth, it does not change the fact that Turkey’s C/A and external financing problem remains the main vulnerability. This holds especially true in times of sharp capital outflows. In summary, despite the benign headline GDP numbers, the mixed quality of underlying growth drivers in H1 2013, the hardly predictable fate of capital flows, slowing private consumption dynamics from H2 2013 onwards as well as weakening tourism revenues (partly due to local and geopolitical risks ahead of the triple elections in 2014) triggered us to revise downwards our GDP growth forecasts for 2013 and 2014 from 4.0% and 4.5% to 3.5% each.

Forecast

Forecast


2009 2010 2011 2012 2013e 2014f 2015f


Real GDP (% yoy) -4.8 9.2 8.5 2.2 3.5 3.5 5.0

Industrial output (% yoy) 6.1 15.4 4.3 -1.3 8.0 9.0 10.0











EUR/TRY (avg) 2.17 2.00 2.34 2.31 2.58 2.73 2.60

USD/TRY (avg) 1.55 1.51 1.68 1.80 1.97 2.10 2.00

Source: Thomson Reuters, wiiw, Raiffeisen RESEARCH

Prospects for capital inflows and domestic demand are the main reasons for revising GDP down Structurally high C/A deficit and political risks have left Turkey the hardest hit market in our CEE universe Following short-term turbulence on the start of Fed tapering, TRY markets to see moderate relief Intensifying US rate hike speculations to revive pressure later on, demanding a forceful local policy response


Real GDP (% yoy)



Market pressure to ease only in the short term

374th quarter 2013

1.6

1.7

1.8

1.9

2.0

2.1

Sep-11Mar-12Sep-12Mar-13Sep-13Mar-14USD/TRY (eop)



6.06.57.07.58.08.59.09.5

10.0


.


TRY rate and yield curve (%)

Turkey

Fore

cast



EUR/TRY 2.68 2.54 2.62 2.71 2.62

Cons. 2.45 2.45 2.45 2.47

USD/TRY 2.00 1.95 2.00 2.10 2.05




Key rate 4.50 4.50 5.00 5.50 5.50

Consensus 4.75 5.25 5.38 5.38

1 month2 7.75 7.20 7.50 7.60 7.60

3 month2 7.94 7.40 7.70 7.80 7.70

6 month2 8.15 7.50 7.80 7.90 7.80


Yield forecasts


2y T-bond2 8.63 8.80 9.30 9.20 9.00

Cons. 7.58 7.94 8.08 7.90

5y T-bond2 8.77 8.90 9.40 9.50 9.2010y T-bond2 9.33 9.20 9.70 10.00 9.90

Cons. 9.00 9.55 9.45 n.a.1 5:00 p.m. (CET) 2 Ask yieldSource: Bloomberg, Raiffeisen RESEARCH

Financial market outlookDuring the recent EM sell-off – which already set in before Fed tapering talks in early May – a discrimination vis-á-vis EM assets took place. On the FX front, countries with relatively large C/A deficits posted the heaviest losses versus USD for the year-to-date (YTD). Just to name a few, the currencies of Turkey (14%), India (16%) and South Africa (18%) have lost the most YTD (as of 13 Sept). Due to structural constraints, mainly in the form of Turkey’s high reliance on energy imports in its domestic demand driven economy, sustainable relief can be only expected from 2014 onwards (assuming an ongoing broadening of the export base helped by the expected economic recovery in core markets). Against this backdrop, it was no surprise that July saw more weakening, with the 12m roll-ing C/A deficit reaching around 6.9% of GDP. The ongoing deterioration in the net gold balance and slowing tourism revenue growth will continue to weigh on C/A dynamics, while the slowdown in private consumption and the weak lira (!) will prevent Turkey from worse. Even more of a concern is the financing side which is covered mainly by short-term hot money inflows. Accelerating portfolio outflows registered in July are not good news in this respect (domestic bond and equity markets lost USD 2.5 bn and 0.5 bn, respectively). In light of Fed taper-ing, which should continue to rebalance foreign portfolio funds away from EM in the short term, Turkey should experience ongoing financial market pressures. Nevertheless, we assume that market participants will get used to the new global monetary policy setup (end of QE3, but still ultra-low G3 rates) and therefore see some relief for TRY markets in Q4 2013. This environment should allow the TCMB to go on muddling through with alternative tightening measures since they have repeatedly emphasised that rate hikes were off the table. When writing this report, the start of Fed tapering was expected to be announced in October or December at the latest. Against this backdrop, additional monetary tighten-ing in Turkey through the macroprudential toolkit is the most likely monetary policy scenario. This – in tandem with ongoing USD selling auctions – should be sufficient to prevent TRY from further major slippages until US rate hike specula-tions intensify. The latter should occur by mid-2014 and exert renewed pressure on TRY markets. This would leave the TCMB little choice but to eventually hike interest rates more decisively to avoid further lira depreciation and excessive drawdowns on the already low net FX reserves.

Stephan Imre

38 4th quarter 2013

Sovereign Eurobonds

Market trendsThe EM sell-off intensified during July-August, even sparking some fears that EM risk cross-selling might develop into a self-reinforcing crisis. Surprisingly, except for Turkey, this time CEE markets lost less compared to traditional EM such as Brazil or Indonesia. This raises the question as to whether CEE may be better insulated from the crisis or whether another reason is behind the relative resil-ience of CEE in the recent past. Our analysis shows that the latter explanation is perhaps more accurate. Taking a look back, we find that CEE underperformed general EM from the start of 2013 until late June. For evidence, we looked at three market segments: credit default swaps (CDS), foreign exchange (FX) and government bond markets (LCY). Using aggregated average 5-year CDS (USD) spread for selective CEE countries, we find that CEE regional risk measured higher in comparison to traditionally larger EM countries such as Brazil, Russia and Turkey. This contrasted a bit with the EMBIG spread for CEE which showed better resilience during the same time span. Historically, the EMBIG spread dif-ferential between CEE and Latin America or Asia remained largely within a 12-month moving average range, while the CEE CDS spread excluding Russia, Ukraine and Turkey averaged higher compared to Brazil or Russia. In the second instance, we find that CEE currencies also performed weaker compared to the broader EM, as measured both against the euro and the US dollar. Indeed, CEE participated less in local currency EM rallies triggered by fund inflows during the period February-May 2013. On the other hand, the CEE region took good advantage of the low interest rate environment in global markets. So far, the yield response of the CEE government debt market to the recent sell-off has been fairly in line with the broader EM, if we exclude inflation differentials. Overall we do not see enough evidence for an EM-specific crisis, while we believe the EM risk re-pricing took place mostly on the heels of UST yield widening. Furthermore, CEE markets did not benefit from the last EM rally except for selected countries such as Romania, since both Eurozone problems and weaker rating outlooks prevented larger fund inflows into the region. Last but not least, the CEE investor base, except for CIS and Turkey, consists primarily of EUR-based investors who are benchmarked to the EUR market. Up to now, fewer European funds have made a run for the exit compared to their American or global counterparts. Consequently, the smaller exposure to the speculative market rally in the spring helped to partly insulate CEE region from larger profit-taking during the exit of EM funds this summer.

Primary marketsIn Q3, the primary Eurobond markets did not inspire much confidence. CEE sov-ereigns remained the largest issuer in Eurobond market accounting for about 70% of all EM sovereign placements in 2013. Despite many CEE governments managing to issue bonds in Q1, the rapid deterioration of market conditions in Q2 and especially in Q3 led to a substantial decline in placement volumes. Q2 placements amounted to only 55% of Q1 volumes reaching just USD 9 bn in

Positive outlook

Smaller exposure to the speculative market rally in spring helped to partly insulate CEE from larger profit-taking Market may feel anxious about lower fund inflows and too many issues potentially worsening the overall technical picture Our colleagues covering developed markets see UST yield widening as fairly overdone from a short-term perspective We expect mildly positive returns in CEE Eurobonds in Q4

EMBIG USD performance*

Index Change (%) Spread (bp)

17-Sep1 qoq YTD 17-Sep1 qoq

PL (A-) 521 0.4 -5.1 157 -7

LT (BBB) 148 1.0 -3.9 209 -15

BG (BBB) 1014 0.9 1.3 68 -45

RU (BBB) 891 0.5 -5.9 222 -13

TR* (BBB-) 587 -3.1 -11.9 274 22

HR (BB+) 126 1.5 -2.8 328 -28

RO (BB+) 119 1.2 -4.3 232 -29

HU (BB) 234 0.9 -1.3 328 -16

RS (BB-) 177 -0.1 -6.4 443 12

UA (B) 558 0.3 -4.5 814 27

BY (B-) 126 0.5 1.4 832 72

Europe* 926 -0.3 -6.7 289 -4

Africa 767 2.2 -6.8 338 -24

Asia 496 -2.9 -11.0 253 20

Mid East 414 1.1 -1.8 446 -3

Latam 568 1.6 -8.5 370 -37Global 618 0.2 -8.1 320 -17

Inv.grade 471 -0.7 -9.6 215 -10

BB 541 0.7 -7.0 359 -13

B 1012 3.0 -4.1 774 -441 closing prices 5:00 p.m. (CET)* TR - Turkey Fitch rating, Europe - CEE, qoq - quarter-on-quarter, YTD - year-to-dateSource: Thomson-Reuters, Raiffeisen RESEARCH

2.0

2.5

3.0

3.5

3.0

4.0

5.0

6.0

Jun-12 Oct-12 Feb-13 Jun-13

EMBIG USD UST 10Y (r.h.scale)

CEE EMBIG vs. UST 10y yields, %*

* JPM EMBI Global index familySource: Thomson-Reuters, Bloomberg

394th quarter 2013

Benchmark Eurobond forecast and performance

Spread Range Spread Range Spread Range

Rating Dur. 17-Sep1 Dec-13 min. max. Perf. (%) Mar-14 min. max. Perf. (%) Jun-14 min. max. Perf. (%)

PL 3% due 23 USD A- 8.4 143 125 161 107 0.2 128 164 110 -0.8 124 160 106 -1.4PL 4.5% due 22 EUR A- 7.1 73 65 80 57 -0.4 67 82 60 -2.0 65 80 57 -4.6LT 6.625% due 22 USD BBB 6.7 161 150 172 139 -0.6 159 181 148 -1.8 149 170 138 -2.5LT 4.85% due 18 EUR BBB 3.9 207 180 234 153 0.6 183 237 156 -0.3 179 233 152 -1.8BG 4.25% due 17 EUR BBB 3.6 177 160 194 143 0.2 167 201 150 -0.8 159 193 142 -1.9RU 4.5% due 22 USD BBB 7.1 156 145 167 134 -0.3 153 175 143 -1.6 144 166 133 -1.6TR 3.25% due 23 USD* BBB- 8.0 244 210 278 176 1.5 212 280 178 0.5 209 277 175 0.0TR 5.125% due 20 EUR* BBB- 5.7 311 280 342 249 1.1 291 353 260 -0.7 278 340 247 -2.3HR 5.5% due 23 USD BB+ 7.3 304 290 317 276 -0.1 311 339 298 -2.4 287 314 273 -1.3HR 6.5% due 15 EUR BB+ 1.2 213 200 225 187 0.0 213 238 200 -0.2 198 223 185 -0.3RO 4.375% due 23 USD BB+ 8.1 229 210 249 191 0.3 220 259 201 -1.3 208 247 189 -1.2RO 4.875% due 19 EUR BB+ 5.2 311 280 342 249 1.0 291 353 260 -0.6 278 340 247 -2.1HU 5.375% due 23 USD BB 7.4 315 290 340 265 0.7 305 355 280 -1.2 288 337 263 -0.6HU 3.875% due 20 EUR BB 5.6 365 340 390 315 0.7 360 411 335 -1.5 337 387 312 -2.5RS 7.25% due 21 USD BB- 5.9 423 385 462 347 1.1 402 479 364 -0.5 382 459 344 -0.5UA 7.5% due 23 USD B 6.4 673 640 705 607 0.8 686 751 653 -2.7 633 698 600 -0.6BY 8.95% due 18 USD B- 3.5 808 760 856 712 1.0 810 905 762 -1.1 752 848 704 0.21 closing prices 5:00 p.m. (CET); * Perf. as cumulative return of gross prices up to forecast horizon, countries sorted by S&P rating, Turkey - Fitch ratingSource: Bloomberg, S&P, Fitch, Raiffeisen RESEARCH

50

70

90

110

130

Jan-13 Mar-13 May-13 Jul-13 Sep-13CEE FX select EM FX select

above 100 = appreciation

CEE and EM FX indices vs. EUR

* FX indices all vs. Euro, index rebased to 31/12/2012 = 100, CEE FX select - PLN, HUF, CZK, BGN, HRK, RON, RSD, TRY, RUB, UAH, EM FX select - BRL, IDR, MXN, THB, ZARSource: Bloomberg, Raiffeisen RESEARCH

-50

0

50

100

Jan-13 Mar-13 May-13 Jul-13 Sep-13

vs. RU vs. TRvs. BR vs. SA

CEE CDS spread vs. selective EM *

* 5-year CDS spread differential vs. selective EM, posi-tive differential means CEE spread lagging peers, CEE CDS - simple average of CDS spreads for PL, HU, CZ, SK, SI, BG, HR, RO, RSSource: Bloomberg, Raiffeisen RESEARCH

monetary terms. Russia’s USD 7 bn Eurobond and Romania’s EUR 1.5 bn bond issued in September boosted Q3 placement volumes. Still, the CEE primary mar-ket remained fairly dull, since – in absolute terms – only two sovereigns tapped the market during the whole of the third quarter. Throughout 2013 Russia, Slo-vakia, Slovenia and Romania ranked as the top four issuers in the CEE market place, followed by Hungary, Turkey and Ukraine. In respect of market perspec-tives, we note that a number of CEE governments are still planning to come to the Eurobond market this year. Among potential issuers we see Turkey and the Baltic countries (Latvia already preannounced a Q4 issue). Still, the market might feel anxious about lower fund inflows and too many issues potentially worsening the overall technical picture for CEE, amidst increasing bond supply risk.

Outlook & StrategyWe see the present market sell-off as being a bit overdone and expect EM funds to return, since the recent risk selling in EM has created some good entry levels for investing in sovereign Eurobonds. In particular, we believe the CEE markets might win back investor confidence thanks to improving economic growth pros-pects and the relatively prudent fiscal policies in a number of countries. Unfor-tunately, CIS markets including Russia might attract less attention since weak economies and a lack of investment development anchors fails to inspire much confidence in difficult market times. We agree with our colleagues covering de-veloped markets who see the UST yield widening as fairly overdone from a short-term perspective, leading them to expect long-term UST yields to remain more stable during Q4. Falling risk aversion and the new investment fund alloca-tions typical for the autumn season should push investors back into EM and help increase demand for CEE assets. Accordingly, we expect mildly positive returns in CEE Eurobonds during Q4. Our investment preference favours credits which have taken a beating recently, such as Turkey where the earlier political crisis offset fundamental improvements. We also recommend Hungarian bonds since we believe the rating outlook will move to stable as economic growth receives the long-needed kick-off.

Gintaras Shlizhyus

Sovereign Eurobonds

40 4th quarter 2013

Corporate Eurobonds

-9% -6% -3% 0% 3%

EMBIG KZ

CEMBI LATIN

CEMBI

CEMBI MIDEAST

CEMBI ASIA

CEMBI RU

CEMBI KZ

CEMBI UA

2013 YTD returns

Source: JP Morgan, Raiffeisen RESEARCH

Concerns that the Fed may begin tapering its bond purchases have abated some-what and the credit market seems to have settled down to the “new business as usual”, with a gradual rise in US Treasury (UST) yields during the third quarter. As we wrote previously, together with increasing yields on the back of cheaper UST, we saw notable spread decompression in May-June. We argued that once the market recovers from the shock, we could see credit spreads compressing again to at least partially offset potential UST yield increases. Our observations suggest that the situation has already started to normalise in Q3. Since our last update in July, the UST 5y rate has increased further to about 1.75% from 1.45%. That said, we calculated a correlation of almost -0.7 between 5y UST yields and the JP Morgan CEMBI Broad RU Index (meaning that when UST yields rise, spreads generally tighten, and vice versa) from the beginning of the year to end-April 2013. However, from mid-May to the end June, when UST yields skyrocketed, this correlation turned to an almost perfectly positive 0.9. From the beginning of July until today, the correlation has declined to less than 0.1, meaning that spreads on Russian corporate Eurobonds have become significantly less sensitive to UST yields rise.

In Q3, spread performance on the global emerging market (EM) corporate index was virtually flat. The index has posted a minor positive total return of 0.4% in QTD, mainly due to the fallout from the LatAm segment. However, the CIS seg-ment has outperformed the rest of the index. In Q3 2013 YTD, Russia returned 2.15% ahead of Ukraine with 0.75% and behind Kazakhstan high-yield (HY) with an impressive 3.3%. Kazakh investment-grade (IG) papers failed to shine again, returning 0.06% in Q3, behind the EMBIG index return of 0.2% and weaker than the EMBIG RU, where returns were at 0.5%. Spread-wise, Russian corporates posted the smallest losses following the market turbulence earlier this year, trading less than 50bp off the local YTD minimums recorded in Janu-ary. In contrast, global EM corporates are almost 80bp off those levels. More volatile Ukrainian and Kazakh HY credits are also trading wider, offering about 270bp and 195bp above their 2013 minimums respectively.

As anticipated, Q3 of this year has been quiet in terms of issuance activity in the asset class – EM corporates have raised about USD 40 bn from the Eurobond market in QTD, compared to USD 102 bn in Q1 and USD 103 bn in Q2. How-ever, despite a weak August and an unimpressive start to September, total EM corporate issuance is running at almost USD 245 bn in 2013 YTD, some USD 75 bn short of the record issuance of over USD 320 bn in FY 2012. However, we believe that EM corporate issuance in 2013 is unlikely to reach last year’s levels. In the year to date, the corporate EM primary market has seen lower credit quality, with only 58% of issuance attributable to IG credits, compared with 71% in 2012. However, during Q3 the IG segment’s contribution jumped to 82% of the total and we generally expect this trend to continue and think that the con-

CIS corporates: Weak in spring, quiet in summer, busy in autumn?

320

370

420

0.6

1.1

1.6

Dec-12 Mar-13 May-13 Aug-13

UST 5y, in %

CEMBI BROAD RU in bp, r.h.s.

UST vs. CEMBI RU Index

Source: Bloomberg, JP Morgan, Raiffeisen RESEARCH

Positive correlation of credit spreads with UST yields is on the decline in Q3 EM corporate market 2012 record issuance unlikely to be challenged after sleepy summer Spread curves steepened as investors preferred short term papers during the uncertain times Fewer attractions across our coverage universe as valuations are getting rich

0%

20%

40%

60%

80%

100%

2007 2009 2011 2013YTD

Asia CIS CEE MENA LatAm

Source: Bond Radar, Raiffeisen RESEARCH

EM corporate issuance (%)

414th quarter 2013

tribution of higher-quality issuers will increase by the end of the year. Issuance was very dull in the CIS during the summer lull, following the market shock in May-June. In August, CIS corporates did not issue a single Eurobond (compared to almost USD 3 bn in August 2012). Russia has accounted for all of the scarce CIS issuance in QTD, valued at USD 2.2 bn. Due to the significant fall in volumes in Q3, the CIS’s contribution to global EM issuance has nudged down to 17.8% in YTD, although this is still elevated in comparison with last year’s 13.8% share. As expected, Ukrainian corporates stayed away from the primary market in Q3 after issuing about USD 4.2 bn in the first half of this year. Contrary to our expec-tations, Metinvest did not issue any paper to refinance its high-coupon bond due 2015 but we still consider the company as a likely issuer in the future. Although quasi-sovereign banks do not appear to need new Eurobond funding, we believe that they – and Ukreximbank in particular – may approach the capital market again if any enticing opportunities present themselves. After a relatively lively Q2 in Kazakhstan (USD 4.1 bn), the country’s corporates have taken a break from issuance. We believe that market attention is currently focused on the mooted sov-ereign issue, as speculation regarding a placement has resurfaced in the media.

As we expect new issuance to be less opportunistic in the next few months, with significantly lower volumes compared to the beginning of the year, we believe that investors will continue to favour secondary market issues. However, since the sell-off in May-June, spreads on many CIS corporates have tightened and in some extreme cases (e.g. Severstal’s paper due 2016) have even reached pre-sell-off levels. This has made us more selective as we currently see fewer attractive bets in our coverage universe than we did at the beginning of July, although the global EM index and Russian corporates are both currently trad-ing 110bp off this cycle’s lows of April 2011. Elsewhere in Ukraine, we would steer clear of investing in the country’s state-owned banks, although these have underperformed their privately-held corporate peers such as DTEK and Metinvest. Spreads on the latter two issuers have moved generally in line with our neutral view and we retain this position on the credits. In Kazakhstan, IG-rated issuers continued to underperform their Russian peers, in line with our underweight view on NC KMG. However, we would prefer to wait and see if the sovereign actually taps the market to reassess our valuation on these credits. In the Kazakh bank-ing space we continue to see significant tail risks. As the market has received no news on Halyk’s acquisition of BTA since March and the available facts are already priced in, we are changing our sell recommendation to hold.

In our last strategy update, we recommended that investors should take more defensive positions, with a stronger focus on shorter durations and higher quality names. As market participants have indeed preferred to stay in shorter durations since the sell-off, such papers have outperformed the market and spread curves have steepened, which is particularly noticeable in the Russian credit remit. We note that longer-term bonds (e.g. due in 2022-2023) from Russian credits such as LUKOIL, Sberbank and VimpelCom currently look more attractively valued compared to their shorter papers (e.g. due in 2017-2018). For instance, the spread between the 2022 and 2017 papers from Severstal surged from 25bp at the beginning of May to 105bp at the end of August.

Alexander Sklemin

0

360

720

1,080

1,440

1,800-60

-40

-20

0

20

40

Dec-06 Aug-08 Apr-10 Dec-11 Aug-13

# upgrades - # downgrades

JP Morgan CEMBI (in bp, right axis,reverse order)

* reverse order Source: Bloomberg, JP Morgan, Raiffeisen RESEARCH

Rating drift in Russia

04080

120160200240280320

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

YTD

USD

bn

CIS CEE ex. CIS LatAm MENA AsiaSource: Bond Radar, Raiffeisen RESEARCH

EM corporate issuance

Selected CIS Eurobonds

Issuer ISIN Maturity Yield in %

Alfa Bank XS05443629729/25/2017 5.0

Alrosa XS055549320311/3/2020 6.1

Evraz XS06189052194/27/2018 7.3

Gazprom XS0885733153 2/6/2020 4.8

Halyk Bank XS0298931287 5/3/2017 5.5

KazMunay-Gaz

XS0556885753 4/9/2021 5.4

VimpelComXS0587031096 2/2/2021 6.7Source: Bloomberg, Raiffeisen RESEARCH

Corporate Eurobonds

42 4th quarter 2013

Value matrix*

Domestic business activity 2 (2)

Exports OECD - excl. Eastern Europe 2 (2)

Eastern Europe 2 (2)

Asia 2 (2)

Company earnings 2 (2)

Key sectors 3 (2)

Valuation - P/E-ratio 2 (2)

Interest rates / yields 2 (2)

Exchange rates 2 (2)

Foreign equity markets 2 (2)

European liquidity 2 (3)

Technical outlook 3 (3)1 (4) denotes highly positive (negative) influence on the market. All factors are weighted equally.* expected trend for the next 3 to 6 monthsSource: Raiffeisen RESEARCH, Raiffeisen Centrobank

Equity market/Austria

Sector structure ATX

Sector Company WeightFinancials CA Immobilien, conwert, Erste Group, Immofinanz, Raiffeisen Bank International, Vienna Insurance Group 41.1%

Industrials Andritz, Oesterreichische Post, Strabag, Wienerberger, Zumtobel 15.9%

Energy OMV, Schoeller-Bleckmann 17.1%

Basic materials Mayr-Melnhof, Lenzing, RHI, voestalpine 18.4%

Telecom Telekom Austria 3.7%

Utilities EVN, Verbund 3.8%Source: Raiffeisen RESEARCH, Raiffeisen Centrobank, Vienna Stock Exchange

After lagging behind for a long while, the Austrian equity market has moved on a strong uptrend since the end of June. In particular, the better-than-expected development of European economic data and the related improvement in senti-ment form the basis for this uptrend, with these factors also triggering rebounds on equity markets with lower levels of market capitalisation. Another interesting aspect was that the ATX outperformed most of its Eastern European peers.The very mild reaction to the stagnant Austrian economic data underlined the fact that it was mainly international factors acting as the driving force behind devel-opments in Austrian shares. For instance, there was no acceleration in economic growth during the second quarter. Nonetheless, the outlook improved at least a little bit. Surveying the various leading indicators, one can expect to see posi-tive development in economic conditions. While our forecasted growth rates of +0.5% for 2013 and +1.5% for 2014 are not particularly robust, they do point to improvement.

In terms of corporate results, Austrian companies have been able to slightly out-perform the poor trend seen at the European level. Generally speaking, most of the quarterly reports of the companies listed in the ATX Prime were in line with expectations. This was probably the case because some one-off effects were

registered and these had already been announced prior to publication of the data. Consequently, the potential for both negative and positive surprises was limited. There were some surprises, however, in particular among com-panies which recorded increases in profits compared to the previous year, as was the case with EVN, Mayr-Melnhof and AT&S, to name a few. Surprises were also seen amongst defensive, late cyclical and regulated com-panies, such as Oesterreichische Post, Flughafen Wien, Telekom Austria and Rosenbauer, all of which were also able to post better results. The guidances for H2 remained broadly unchanged. The main reason for this was the profit warnings, which some companies had already given in previous months. As for sentiment amongst Aus-trian companies, the mood is generally neutral and can even be seen as subdued at times, considering that there

Conditions supportive for rising share prices

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

1996 1998 2000 2002 2004 2006 2008 2010 2012ATX Valuation discount ATX vs DAX (r.h.s.)*

ATX shows discount

* Cyclically adjusted price/earnings ratio based on rolling 10 year trailing index earningsSource: Thomson Reuters, Raiffeisen RESEARCH

Valuations still moderate Double-digit earnings growth in 2013 ATX tipped to go higher

434th quarter 2013

Fair value of ATX1 - September 2014

Bond yields (10y)

EY-BY2 2.50% 3.00% 3.50%

8.25% 2,118 2,024 1,9388.00% 2,169 2,070 1,9807.75% 2,222 2,118 2,0247.50% 2,277 2,169 2,0707.25% 2,336 2,222 2,1187.00% 2,397 2,277 2,1696.75% 2,462 2,336 2,2226.50% 2,530 2,397 2,2776.25% 2,603 2,462 2,3366.00% 2,679 2,530 2,3975.75% 2,760 2,603 2,4625.50% 2,847 2,679 2,5305.25% 2,938 2,760 2,6035.00% 3,036 2,847 2,679

1 based on the expected earnings for 2013/2014 (i.e. 227.7 index points)2 earnings yield less bond yieldSource: Raiffeisen RESEARCH, Raiffeisen Centrobank

Valuation and forecasts


12-months forward earnings 227.8 210.1 215.9 221.8 227.7

Bond yield forecast 2.38 2.45 2.65 3.00 3.10

Earnings yield less bond yield (EY-BY) 6.74 5.50 5.25 5.00 5.25

ATX-forecast based on EY-BY 2642 2733 2772 2727

ATX-forecast 2,498.9 2,630 2,750 2,800 2,720

Expected price change 5.2% 10.1% 12.1% 8.9%

Range 2300-2750 2400-2850 2500-2950 2500-2950

P/E based on 12-month forward earnings 11.0 12.5 12.7 12.6 11.91 11:59 p.m. (CET); Source: Raiffeisen RESEARCH, Raiffeisen Centrobank

Earnings yield* less bond yield

*Earnings yield = E/P; based on 12-month forward earningsSource: Thomson Reuters, Raiffeisen RESEARCH, Raif-feisen Centrobank

0

5

10

15

20

2002 2004 2006 2007 2009 2011 2013Fo

reca

st

Equity market/Austria

was frequent talk of rising cost pressures and weak sales performance during the rest of the year. Exceptions in this regard were Rosenbauer and SBO, which are currently enjoying a solid order situation. Optimism was also seen among cycli-cal companies, such as voestalpine and RHI.

Although the profitability of Austrian companies is impaired by the sluggish eco-nomic performance, we still believe that earnings growth will be in the solid double-digit range in 2013 (estimate: +24%). This stands in sharp contrast to companies in the DAX and Euro STOXX 50, which are likely to see declines in earnings this year. In our view, valuation levels continue to be moderate. The estimated P/E ratios for 2013 and 2014 are 12.2 and 11.0, respectively. Look-ing at the cyclically adjusted P/E ratio, however, there is still a clear discount in valuations, for instance compared to the German stock market. As we have frequently pointed out, we do not see this difference as being justified.

In the coming months, the key factors should continue to be discussions about the liquidity measures of the major central banks and the increasingly widespread signs of a recovery in the global economy. In relation to the last point in particu-lar, we expect to see further improvement in the economic data. More increases in leading indicators are certainly expected in the euro area. We believe that the Austrian stock market will perform well in such an environment, profiting from its modest valuations and the generally lower risk aversion vis-à-vis stock markets with lower capitalisation. Taking all of this into account, we expect to see the ATX at higher levels by the end of the year. “Buy”.

Johannes Mattner

44 4th quarter 2013

Equity market/CEE

The outlook for the CEE equity markets is positive for the fourth quarter of 2013. In particular, we are optimistic about the remainder of the year, based on the trends in the established financial markets. Key rates should remain at their cur-rently very low levels until end-2014 (Fed) and early 2015 (ECB) and thus not present any grounds for concern for the time being. A reduction of the surplus liquidity in Europe and “tapering” in the USA (i.e. winding up the US central bank’s bond purchasing programme) is unavoidable and in our view this will occur gradually moving along into next year. In light of the abundant liquid-ity, however, we do not believe that the equity markets will “dry up”. On the contrary, for lack of alternatives, more capital will flow into this asset class and consequently we see favourable conditions for CEE stocks with lower valuations in particular. In economic terms, the bottom of the cycle is behind us, and we project a significant acceleration in economic dynamics next year. This should already be reflected in improving leading indicators in Q4 2013 and should support an upbeat end to the year on the stock markets.

The Russian MICEX index recorded handsome gains for the third quarter, mostly due to the increases in the price of oil as a result of the Syria crisis. By contrast, economic performance in Russia itself did not lend any support, and this will remain the case, as the sub-average GDP growth should continue for the foresee-able future (2014f: +2.0%). Furthermore, this is reflected in rather lacklustre cor-porate earnings growth (2014f: +3.5%). At the same time, it should be noted that the energy sector, with a weighting of 50.3% in the index, is mainly responsible for this modest figure (earnings growth for the energy sector in 2014f: -3,6%). Sectors with lower weightings, such as materials, retail and financials, on the other hand, feature good-looking double-digit growth rates. One important posi-tive boost for the Russian equity market (which is strongly driven by non-resident investors) will be the improvement in sentiment due to the economic recovery in Europe and the USA, along with stabilisation in China. Above and beyond this, we continue to expect a moderate increase in the price of oil (even without the Syria crisis), and support should also come from the attractive valuation of Russian stocks. Additionally, the local trading volume has increased markedly since September, thanks to the transition to a new settlement system (now T+2, in

Positive end expected for the year

Value matrix stock markets

PL HU CZ RU RO HR TR

Politics 3 (2) 4 (4) 3 (3) 2 (2) 2 (2) 2 (2) 3 (4)

Interest rate trends 2 (2) 1 (1) 1 (1) 1 (1) 1 (1) 2 (2) 2 (2)

Earnings outlook 3 (4) 2 (2) 1 (2) 3 (3) 1 (1) 3 (2) 2 (2)

Key sectors 3 (3) 3 (2) 3 (3) 3 (3) 2 (3) 3 (2) 2 (2)

Valuation (P/E) 2 (2) 1 (2) 2 (2) 1 (1) 1 (1) 2 (2) 2 (2)

Liquidity 1 (1) 3 (3) 3 (3) 1 (2) 3 (3) 4 (4) 1 (1)

Technicals 3 (3) 2 (3) 1 (2) 2 (2) 1 (3) 2 (4) 3 (3)1 (4) denotes highly positive (negative) influence on the market. All factors are weighted equally. Assessment refers to a 3-month period. Source: Raiffeisen RESEARCH

60

90

120

150

180

2010 2011 2012 2013CROBEX10 BETBIST Nat. 100

SEE indices in comparison

In local currencySource: Bloomberg, Raiffeisen RESEARCH

Economic recovery, both at the local and international level Demand for equities expected to be higher on seasonal grounds CEE stock market valuations look relatively attractive Local factors gaining importance

30

40

50

60

70

80

90

100

2008 2009 2010 2011 2012 2013BUX WIG20 PX

In local currencySource: Thomson Reuters, Raiffeisen RESEARCH

Region‘s core indices

454th quarter 2013

line with the major international stock markets), and this means that a sustained improvement can be expected in trading volumes on the Moscow market. Buy.During the third quarter, Poland’s WIG 20 equity market index suffered a major slump due to worries about the upcoming pension reform plans, but the subse-quent rebound then occurred very quickly. As for the pension reform itself, the government bonds held by the private pension funds (OFE) are to be taken over by the state-run pension system (ZUS), helping to lower the mounting debt ratio by around eight percentage points. The reason for the rapid rebound, however, was that the equity holdings of the private pension funds will not be affected by this. Nevertheless, the previously obligatory payments will be transformed into a voluntary option, with the period for a written declaration limited to three months. If no decision is made, the default selection is the state system. For 2014, we expect to see an economic recovery, but anticipated aggregate earnings growth is projected to be very modest at 2.6%, and thus the valuation will hardly decline (2014f P/E ratio: 12.8). Thanks to the positive international trend, we forecast mild increases in prices, but no outperformance compared to the region, in light of the fact that future payments into the private pension system will be lower and thus inflows into the Polish equity market will also be lower. Buy.During the third quarter, the Czech PX posted quite impressive gains, which was mainly due to the strongly weighted financials as well as CEZ and Telefonica CR. CEZ and Komercni Banka will be listed in the widely watched Stoxx Europe 600 starting from 23 September and thus may appeal to a broader range of investors.

Indices in performance comparison

2004 2005 2006 2007 2008 2009 2010 2011 2012 17-Sep1

ATX 57.4% 50.8% 21.7% 1.1% -61.2% 42.5% 16.4% -34.9% 26.9% 4.1%

BUX 57.2% 41.0% 19.5% 5.6% -53.3% 73.4% 0.5% -20.4% 7.1% 2.5%

WIG 20 24.6% 35.4% 23.7% 5.2% -48.2% 33.5% 14.9% -21.9% 20.4% -8.4%

PX 56.6% 42.7% 7.9% 14.2% -52.7% 30.2% 9.6% -25.6% 14.0% -5.9%

MICEX 6.6% 84.3% 67.5% 11.5% -67.2% 121.1% 23.2% -16.9% 5.2% -0.1%

BET 101.0% 50.9% 22.2% 22.1% -70.5% 61.7% 12.3% -17.7% 18.7% 13.1%

CROBEX 32.1% 26.4% 62.2% 63.2% -67.1% 16.4% 5.3% -17.6% 0.0% 4.5%

BIST Nat. 100 n.a. n.a. -1.7% 42.0% -51.6% 96.6% 24.9% -22.3% 52.6% -4.4%

CECE Composite Index 57.1% 44.7% 14.7% 10.5% -53.7% 40.5% 15.7% -29.1% 25.7% -10.3%

DAX 7.3% 27.1% 22.0% 22.3% -40.4% 23.8% 16.1% -14.7% 29.1% 12.9%

Euro Stoxx 50 6.9% 21.3% 15.1% 6.8% -44.4% 21.1% -5.8% -17.1% 13.8% 9.7%

S&P 500 9.0% 3.0% 13.6% 3.5% -38.5% 23.5% 12.8% 0.0% 13.4% 19.5%

MSCI World 9.5% 13.7% 13.5% 2.8% -40.1% 22.8% 7.8% -7.6% 13.1% 17.8%In local currency1 11:59 p.m. (CET)Source: Bloomberg, Thomson Reuters, Raiffeisen RESEARCH

Stock market indicators

Long-term growth Earnings growth Price/earnings ratio Dividend yield2012 2013e 2014f 2012 2013e 2014f 13e

ATX 5.8% 7.7% 24.0% 11.6% 15.2 12.2 11.0 3.1%

WIG 20 4.0% -4.5% -22.5% 2.6% 10.1 13.2 12.8 4.6%

BUX 5.1% -16.5% -5.3% 11.9% 9.5 9.9 8.9 3.7%

PX* 6.1% 24.3% -10.9% 16.8% 12.3 13.4 11.5 4.7%

MICEX 5.4% -12.2% -1.3% 3.5% 4.9 5.6 5.4 4.2%

BET 7.1% -10.0% 20.3% 12.0% 8.1 7.5 6.7 3.8%

CROBEX10 3.8% 45.4% 25.6% 5.9% 9.6 10.6 10.0 5.5%

BIST Nat. 100 8.9% 23.7% 1.1% 7.6% 12.6 10.6 9.9 2.5%1 Czech Rep. (PX): excl. Orco PropertySource: Thomson Reuters, IBES, Bloomberg, Raiffeisen RESEARCH

Expected index performance

Source: Raiffeisen RESEARCH

0%2%4%6%8%

10%12%14%16%

ATX

WIG

20

BUX PX

MIC

EX BET

CRO

BEX1

0

BIST

Nat

. 100

Dec-13 Mar-14

Equity market/CEE

46 4th quarter 2013

Equity market/CEE

During Q2 2013, the economy grew by 0.6% compared to the previous quarter (Q1 2013), finally bringing the Czech Republic out of 6 quarters of recession (2014f GDP growth: +1.9%). With a 2014f P/E ratio of 11.5, the fundamental valuation of the PX looks modest, whereas the 2014 earnings growth forecast of +16.8% and the dividend yield of 4.8% are among the highest in the CEE peer group. Furthermore, the PX is the only index in the CEE region whose dividend yield offers a significantly better return than the country’s government bonds. Key rates will remain at the record low level of just 0.05%, and non-resident investors will also profit from the modest appreciation of CZK. Buy.During the third quarter of 2013, the Hungarian BUX suffered a loss, leaving it just barely in positive territory for the year to date. In terms of economic perfor-mance, we expect to see more slow recovery in Hungary (GDP 2014f: 1.5%), accompanied by further rate cuts in the future. At the same time, investments may remain low, undermined by planning uncertainties related to Viktor Orbán’s political moves (e.g. conversion of FX loans, new taxes, etc.) and the elections slated for April 2014. With a projected 2014f P/E ratio of 8.9, the BUX looks relatively attractive in a CE comparison, and thus there should be some support on the downside. Aggregate corporate earnings growth for 2014 is currently forecast at 11.9%. Despite the political uncertainties, we expect positive perfor-mance in the fourth quarter, thanks to the upbeat international trends. Buy.During the period under review, the Istanbul stock exchange struggled with dif-ficulties. Along with the escalating conflict between anti-government demonstra-tors and the Turkish police, massive outflows of capital from EM countries were also seen in recent months, triggering sharp depreciation of EM currencies. The Turkish financial market was also impacted by this, even though the problems here were not as bad as in many other Emerging Markets. The outlook for a step-by-step reduction of liquidity (we expect an announcement to this end by the Fed until year-end) leads us to assume that capital outflows will continue in the fourth quarter as well. In terms of the economic prospects, we are somewhat more cautious and downgrade our forecast for 2014 GDP growth by one percentage point to 3.5%, which is still quite a strong figure. Weakening has also been seen in the sphere of corporate earnings prospects, and we now anticipate an increase of just 1.1% on an aggregate basis for the BIST National 100 leading index. All in all, we expect that the stock exchange in Istanbul will end the year on a positive note, amidst generally good overall market conditions. Buy.

Index estimates

17-Sep1 Dec-13 Mar-14 Jun-14 Sep-14 Recommendation

ATX 2499 2630 2750 2800 2720 BUY

Performance 5.2% 10.0% 12.0% 8.8% since 1/1/13

Range 2300-2750 2400-2850 2500-2950 2500-2950 4.1%WIG 20 2365 2490 2570 2620 2520 BUY


Range 2150-2650 2300-2700 2400-2800 2200-2800 -8.4%BUX 18629 19600 20500 21000 20000 BUY


Range 17000-21500 18000-22500 19000-23000 18000-22000 2.5%PX 978 1030 1070 1100 1070 BUY


Range 850-1100 1000-1250 1000-1250 1000-1250 -5.8%In local currency1 11:59 p.m. (CET)Source: Thomson Reuters, Raiffeisen RESEARCH

0

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tria

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ia

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Turk

ey

2012 2013e 2014f

P/E ratios in comparison

* Czech Rep. (PX): excl. Orco PropertySource: Thomson Reuters, IBES, Bloomberg, Raiffeisen RESEARCH

-30%

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10%

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50%

Aus

tria

Pola

nd

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gary

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Russ

ia

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Cro

atia

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ey

2012 2013e 2014f

Earnings growth

* Czech Rep. (PX): excl. Orco PropertySource: Thomson Reuters, IBES, Bloomberg, Raiffeisen RESEARCH

474th quarter 2013

-50

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2012 End of August 2013

0,72

bn

1,02

bn

04080

120160200240280

Russ

ia

Turk

ey

Pola

nd

Aus

tria

Rom

ania

Cze

ch R

ep.

Cro

atia

Hun

gary

535.

7

Market capitalisation overview

In EUR bn; end of August 2013Source: FESE, WFE, BSE, ZSE, Raiffeisen RESEARCH

Avg. daily turnover (EUR mn)

Source: FESE, WFE, BSE, ZSE, Raiffeisen RESEARCH

Index estimates

17-Sep1 Dec-13 Mar-14 Jun-14 Sep-14 Recommendation

MICEX 1473 1550 1620 1650 1600 BUY


Range 1300-1700 1350-1750 1350-1750 1300-1700 -0.3%BET 5825 6400 6800 6900 6800 BUY


Range 5300-6900 5500-7000 6000-7200 5800-7000 13.1%CROBEX10 1029 1080 1130 1150 1130 BUY


Range 920-1100 950-1200 1050-1250 1000-1200 5.9%BIST Nat. 100 74783 81000 86000 88000 86000 BUY


Range 70000-85000 75000-90000 80000-92000 78000-90000 -4.4%In local currency1 11:59 p.m. (CET)Source: Thomson Reuters, Raiffeisen RESEARCH

The Romanian equity market is gradually becoming our favourite this year. With a performance of +8.0% in the last three months, the BET leading index has built on its gain of more than 13% for the year to date. The stock exchange in Bucharest was boosted strongly by the earlier-than-expected agreement on a new Stand-By Agreement (SBA) with the IMF, which underlines the government’s progress in implementing reforms and proceeding with privatisations. The eco-nomic prospects also look good: following a pick-up in economic performance (GDP 2013e: +2.5%), we also expect to see sustainable, significant real eco-nomic growth in the next two years (+2.0% and +2.5%). The fading inflationary pressure will also allow for vigorous reductions in interest rates, from the current level of 4.5% to 3.75% by year-end and to 3.5% by early 2014. We believe that this will provide good support for corporate earnings: the BET stands out in this regard, with growth rates of +20.3% for 2013e and +12.0% for 2014f, resulting in an extremely attractive looking valuation (2014f P/E ratio: 6.7). This results in a positive mix of attractive fundamentals and solid macro-data for the Romanian equity market, prompting us to project disproportionately strong gains for the BET. Buy.The Croatian CROBEX10 managed to bounce back slightly in the last three months, consolidating its gain of around 4.2% for the year to date. We ascribe this performance more to the impact of EU accession on 1 July and to the overall positive trends on the broader markets, rather than to any local fundamental factors. While EU accession will result in a long-term acceleration of the con-vergence process with increasing capital inflows from abroad, this is not yet having much of an impact on the stock exchange in Zagreb right now. So far in 2013, the average daily trading volume on the stock market has only increased by 0.3% compared to 2012. The economic prospects for this year are bleak and the outlooks of the rating agencies are also mostly negative, due to the lack of progress in reforms. Accordingly, we tend to see more downside risk in rela-tion to corporate earnings for the CROBEX 10 stocks. The poor macro-economic conditions are counterbalanced somewhat by the moderate valuation, with an aggregate P/E ratio of 10 (2014f) for the index. However, if one excludes the 45% state-owned oil&gas company INA (in which the Hungarian company MOL holds a 49% share) from the calculation, the P/E ratio of 16 for the remaining names in the index does not look all that attractive. While we expect positive performance through to year-end, we believe the development of the CROBEX 10 will be sub-average in a regional comparison. Buy.

Aaron Alber, Andreas Schiller

Equity market/CEE

48 4th quarter 2013

Poland: Pension system changes negative for financial markets

Treasury bonds, 42%

Cash, 6%

Equities, 41%

Other debt instruments,

11%

Other, 0.5%

Source: KNF, Raiffeisen Centrobank

AUM composition end-August

Cash, 6%

Equities, 84%

Other debt instruments, 9%

Other, 1%

20 25

3545

21

0%

25%

50%

75%

100%

Current After changesBanks Foreign investorsOFE InsurersMutual funds Others

Source: Raiffeisen Centrobank estimates

Source: national sources, Raiffeisen RESEARCH

AUM composition after 51.5% transfer

Changing structure PL debt market

Special

Proposed changes combine treasuries cancellation and voluntary character of the private pension funds going forward Public debt to GDP to decrease, yet the volatility of PLN should increase Mid-term, the Polish pension funds should be net Polish equity sellers

Generally speaking recent pension system changes in Poland are a decision against a market-based pension system. After the reform the longer term sustain-ability of the pension system could be lower than before, but recent changes were motivated by more short-term political considerations anyway. The worst-case scenario of the full nationalization of the private pension funds is not going to materialize. On the other hand, however, the voluntary character of the system going forward, the immediate (51.5% of AUM) and gradual (10 years before retirement) shift of funds to the state as well as the sudden increase of the equity bias of the funds’ investment following the 51.5% AUM transfer will have a num-ber of consequences.First of all, the introduced changes will give some relief to the public budget deficit and debt, allowing the government to better accommodate the expected EU funds from 2014 on. Furthermore, we see the flows to the funds positive in 2014 and going forward (until the current 40-and-less year-olds have 10 years to retirement). We also project the inflows/outflows to balance if some 20% of the existing and future OFE members decide to opt-in to the system. In addition to that, we also see the funds having enough treasury bonds, state-guaranteed bonds and cash holdings to facilitate the 51.5% AUM transfer without liquidating equity or corporate bond holdings.On the other hand, however, having transferred the 51.5% of AUM to ZUS, the private pension funds will be heavily geared towards the equity market (on August-end data at 84%) and notably towards the Polish equity market (almost 81%). Therefore, we would expect new money to be predominantly invested into corporate bonds (probably impacting spreads, investment into treasuries will not be allowed), money market instruments as well as foreign assets (the funds will be gradually allowed to have 30% of their holdings abroad). In addition our simu-lation indicates that the funds will be probably aiming to decrease their current Polish equity investments in order to mitigate and diversify risks. Hence, we expect the OFEs to be suppliers of Polish equities going forward.With regards to the implications on the government bond market the assessment is a mixed one. The share of foreign investors on the sovereign debt market will increase from 35% to 45% without the participation of pension funds on this mar-ket. Such an increase is likely to boost the overall market volatility, which may also increase the FX risk for the Polish economy and for FX denominated assets in Poland. The factors mentioned beforehand can be seen as slightly negative. On the other hand the overall market sophistication of the Polish government bond market (e.g. in terms of interest rate derivatives etc.) may increase without the participation of the pension funds (usually buy-and-hold investors). With regards to the banking sector one has to add that some corporates may find it more difficult to raise capital via the bond market going forward (because of lower demand from OFE). Therefore, credit demand from the corporate sector may increase above its past trend in the years to come. As concerns the market/rat-ing implications it has to be added that the recent pension reform move was seen slightly negative (despite its positive effect on public debt), as it undermines the (on paper) sound and strict domestic public debt governance framework.

Gunter Deuber, Bartlomiej Kubicki

494th quarter 2013

Financials

Sector comparison

Company Recommendation Target price P/E P/B DY

2013e 2014f 2013e 2014f 2013e 2014f

Erste Group UR EUR 24.50 15.7 9.7 0.8 0.8 2.0% 2.3%Komercni Banka Hold CZK 4,400 13.0 12.3 1.7 1.6 4.9% 5.4%OTP Hold UR 8.2 7.2 0.8 0.7 3.3% 3.8%PKO BP Buy PLN 39.90 14.1 12.3 1.8 1.6 3.2% 3.6%BZ WBK Hold PLN 340.00 19.2 15.3 2.1 2.0 2.6% 3.3%Getin Noble Bank Buy UR 15.6 11.9 1.2 1.1 0.0% 0.0%Bank Pekao SA Hold PLN 171.00 16.9 15.6 1.9 1.8 4.4% 4.8%BRE Bank Sell PLN 389.00 15.3 15.2 1.8 1.7 2.9% 3.3%Bank Millennium Reduce PLN 5.74 18.4 16.6 1.6 1.5 1.4% 1.8%BRD-GSG Hold RON 8.24 35.8 10.4 1.0 0.9 1.0% 3.7%Banca Transilvania Hold RON 1.26 10.1 9.4 1.0 0.9 0.0% 2.0%Komercijalna Reduce RSD 1,200 5.9 6.2 0.4 0.3 0.3% 0.3%Aik Banka Hold RSD 1,500 4.6 4.5 0.3 0.2 0.0% 0.0%RBI NC NC 12.5 8.0 0.6 0.5 3.7% 4.1%

NC = no coverage; UR = under revisionSource: Raiffeisen Centrobank estimates

Current valuation limiting upside for Q4 13

ErsteOTP

PKO

BZ WBK

GNB

Pekao

BRE

Millen-nium

BRDTLV

Ko-mercni

KMBAIK

RBI

0

0.5

1

1.5

2

2.5

4% 9% 14% 19%

P/B

2014

e

RoE 2014eSource: Raiffeisen Centrobank estimates

P/B - RoE 2014 regression

-50%

0%

50%

100%

2-Aug-13 23-Aug-13 13-Sep-13premium to TK bankspremium to Sberbankpremium to Komercnipremium to EM banks

Source: Bloomberg

PL banks’ P/B premium vs. peers

Quite untypical for the summer time, the banks from our universe, apart from OTP, have rallied on the wings of earnings surprises and expected macro recov-ery signals (Polish, Romanian banks, Komercni) but also partially on capital re-lated news-flow (e.g. Erste deciding to repay participation capital). Polish banks’ P/B premium skyrocketed since May, reaching a 3Y record high in mid-August, and in particular to 60-70% over Turkish and Russian banks (heavily helped by political turbulences in Turkey and pressure from commodity-rich Russia). OTP was the clear underdog, giving back a lot of its macro-recovery-driven H1 13 outperformance, as a result of the pending final decision about the next FX mort-gage haircut with banks likely facing another write-off load: in a worst–case sce-nario we calculate a HUF 450 per share impact for OTP and EUR 1.0 per share impact for Erste. In 4Q we believe that the Asset Quality Review performed next year by the ECB and the stress test conducted by the European Banking Authority will get into the centre of attention.With P/B and RoE trends of Polish banks drifting apart ytd, we might see their premium coming continuously down after a sharp contraction started in late Au-gust (local pension fund reforms and the return of high risk appetite towards Turkish/Russian banks), even though their RoE growth outlook should turn posi-tive thanks to NII/NIM recovery given the end of the cycle of key rate cuts and solid asset quality. In Poland we would play on laggards like PKO with attractive multiples showing a 13% P/E discount to local names, a valuation of 1.6x BV (which is not rich) vs. RoE of 15% and positive triggers from the recent takeover of Nordea. In case of introduction of a banking tax, PKO looks less sensitive than the sector average. We confirm our “underweight” calls for MIL and BRE. After the summer catch-up, we took Komercni from our “buy” list (now facing risks from the banking tax) and keep our neutral view on OTP given the uncertainties in Hungary and weakening earnings momentum in Russia. On the M&A front, we could see some small progress in Poland in Q4 13 (Pekao declared to be interested in local names) and Croatia (OTP, Erste apparently looking at HPB).

Jovan Sikimic

Premium of PL banks vs. emerging banks to narrow from peak level in August Interest margins to normalise across the region in the next quarters PKO is left as the only “buy” call, Erste, Komercni, GNB performed well during Q3 13

50 4th quarter 2013

Oil & Gas

Middle East geopolitics is back in play

Sector comparison

Company Recommendation Target price PER EV/EBITDA P/CE

2013e 2014e 2013e 2014e 2013e 2014e

OMV Buy EUR 42.40 5.7 8.2 3.2 3.7 2.2 2.9OMV Petrom Buy RON 0.52 5.5 5.3 2.6 2.4 3.1 3.0MOL Hold HUF 17,400 20.7 18.1 6.7 6.6 3.9 3.5PKN Hold PLN 45 12.4 8.4 6.3 5.2 5.3 4.3Lotos Sell PLN 34 28.9 5.5 10.4 5.8 4.1 3.2Gazprom Hold RUB 145 3.4 2.9 2.5 2.1 2.2 2.0Novatek Buy RUB 446 12.5 10.8 8.3 7.0 10.2 10.5LUKoil Buy RUB 2,555 5.5 5.5 3.2 3.2 3.4 3.4Rosneft Hold RUB 246 11.1 10.5 6.2 5.8 5.6 5.4Tatneft Reduce UR 7.1 7.3 5.0 5.3 5.4 5.6UR= under revisionSource: Raiffeisen Centrobank estimates

Since the beginning of July, the price of Brent has recovered and hovered around the USD 110/bbl level for a few weeks until spiking to above USD 118/bbl at the end of August. Although the widely discussed concerns of weaker global demand centred on China, the crude price increase in the second half of August showed that the market fears a possible disruption of supply, rather than weaker demand. Besides geopolitical tensions in the Middle East region, there are con-cerns that the spare capacity of Saudi Arabia might not be enough to compen-sate for the lost barrels in Libya and, more importantly, for the possible disruption of oil exports from Iraq. Various market sources stated that Iraq is planning to temporarily halt part of its production in order to upgrade its export infrastruc-ture. Consequently, we forecast the Brent oil price to stay above USD 110/bbl with some short-term price spikes being expected. In the downstream segment refining margins in Europe remain at “normal” levels of above USD 5/bbl, which, however, provides little support to refiners. In spite of early signs of a gradual recovery of motor fuel consumption, the in-land price premium has yet to provide meaningful support. Therefore, it was the seasonal strengthening of the retail sales and healthy petrochemical margins which made the downstream segment results surprise the market in Q2. Going forward, we maintain our cautious view for the refining sector in 2013, reckoning that the integrated downstream players with petchem exposure are in a better position than pure refiners.We continue to favour upstream players. We believe that OMV (“buy”) has re-gained its attractiveness following the recent acquisition of oil fields in regions with stable political and fiscal environments. LUKoil’s active share buyback and higher-than-expected dividends are regarded as short-term triggers. Novatek shares should be driven by the gas export rights and stronger results on the back of the launch of the Ust-Luga complex, in addition to the Yamal LNG project be-coming more visible after the agreement with China’s CNPC.

Oleg Galbur

28

29

30

31

32

Jan Mar May Jul Sep Nov

2011 2012 2013

* million barrel of oil equivalent per daySource: IEA Oil Market Report Aug 2013

OPEC Crude Oil Production, mnboepd*

9095

100105110115120125130

Jan Mar May Jul Sep Nov

2011 2012 2013

Source: Bloomberg

Brent oil price, USD/bbl

Oil prices supported by geopolitical tensions and concerns over supply Refining margins pressured by high oil price and slow recovery of fuel consumption We favour Novatek and LUKoil in the CIS and OMV and OMV Petrom in CEE

514th quarter 2013

Utilities

German Monopolies Commission recommends subsidy cut Electricity prices react positively “Buy” recommendations: Enea, CEZ

Bottoming out?

-10%-5%0%5%

10%15%20%

Verb

und

EVN

RusH

ydro

DJ E

uros

toxx

Util

ities

Euro

stoxx

50 PGE

E.O

n Ru

ssia

ENEA

RusH

ydro

Inte

rRA

OC

EZTr

ansle

cetri

caTr

ansg

azFe

dera

l Grid

…En

el O

GK-

5

Source: Bloomberg

Strong outperformance in September*

95

105

115

125

95

105

115

125

Jun-13 Jul-13 Aug-13

Power (EUR/MWh)Oil (EUR/bbl)CO2 (r.h.s.)

Source: Bloomberg

Power prices: Bottomed out?

Sector comparison

Company Recommendation Target price P/E EV/EBITDA DY

2013e 2014f 2013e 2014f 2013e 2014f

CEZ Buy CZK 670 6.8 7.4 4.7 5.1 8.7% 8.1%Enea Buy UR 10.5 12.4 3.2 4.1 2.9% 2.4%Enel OGK-5 Buy RUB 2.02 5.5 6.1 4.0 4.0 3.9% 5.9%E.On Russia Buy RUB 3.54 9.1 9.4 4.5 4.3 4.4% 5.3%EVN Hold EUR 11.00 17.0 10.2 3.5 3.4 3.8% 3.9%Federal Grid Company Hold UR 5.5 5.0 3.5 3.8 1.8% 2.0%InterRAO UR UR 5.9 5.1 1.7 1.5 1.7% 2.9%PGE Hold PLN 18.00 10.0 11.5 4.2 4.6 5.5% 4.8%RusHydro Buy RUB 1.01 6.2 4.3 3.4 2.6 2.2% 4.7%Tauron Reduce PLN 4.20 10.1 10.7 5.0 5.3 3.0% 2.8%Transelectrica Hold RON 15.40 15.1 10.6 4.0 3.9 5.6% 5.2%Transgaz Buy RON 239 8.1 6.0 3.0 3.4 6.4% 14.1%Verbund Hold EUR 15.00 8.6 18.3 7.5 9.0 5.9% 3.0%UR = under revision Source: Raiffeisen Centrobank estimates

Good news from Germany propelled European utility companies to a sensational performance in September, so that they managed to keep pace with the whole market. Above all the severely battered electricity producers in CEE (CEZ and Verbund, indirectly also EVN) bounced back sharply as also wholesale electric-ity prices climbed by almost 10% within a few days. Even Polish utilities, which reported an excellent performance in H1, registered gains. Only Russian utilities continued to perform below average as they are awaiting new regulations.

Shortly before the election to the German Bundestag, Germany’s Monopolies Commission published its reform proposals for the energy markets. To reduce exploding costs for subsidising renewable energies, there are plans to allocate green electricity certificates based on the Swedish model instead of maintaining technology-dependent tariffs. These certificates should increasingly be purchased by distribution companies. The plan aims to stop the over-subsidisation of less efficient technologies and, at the same time, provide clear directions for new con-struction. In addition, a capacity market was ruled out. Electricity prices showed an immediate positive response to this news, because the capacity overhang is expected to grow at a slower pace than currently.

However, coordination at European level is indispensable given the different po-litical thrusts and also in light of the differentiated problems: for example, Poland will soon be undersupplied without expansion of its grid or power plant fleet, whereas Germany is almost oversupplied thanks to the excess supply of renew-able energies. At present, it is not yet clear where all this is going: Poland, for instance, considers capacity markets positive, whereas they are rather frowned upon in Western Europe. In our opinion, the EU Commission will not deal with this issue before Q1 14, and we are hence only cautiously optimistic.

The general sector under-allocation appears to have decreased – even if the effect of higher electricity prices will hardly be felt next year. Our current “buy” recommendations are CEZ and Enea.

Teresa Schinwald

52 4th quarter 2013

Industrials

Sector comparison

Recommendation Target price P/E EV/EBITDA DY

Company 2013e 2014f 2013e 2014f 2013e 2014f

Andritz UR UR 19.9 14.7 8.9 5.5 2.9% 3.6%

Palfinger Hold EUR 26.00 18.6 14.2 11.3 8.7 1.8% 2.3%

Rosenbauer Hold EUR 60.00 13.8 10.9 7.7 6.4 2.1% 2.1%

Lenzing RS RS 14.5 11.4 7.0 6.2 3.2% 3.5%

Zumtobel Hold EUR 10.00 28.4 14.0 6.4 5.2 1.3% 2.5%

Polytec RS RS 10.2 8.5 3.9 4.1 6.1% 6.9%

Semperit Hold EUR 34.50 13.5 12.2 7.1 6.5 2.5% 2.7%

Mayr-Melnhof Hold EUR 90.00 13.6 12.0 5.1 4.5 2.8% 2.8%RS = recommendation suspended; UR=under revision Source: Raiffeisen Centrobank estimates

Solid Q2 reporting season

-30

-20

-10

0

10

20

Sep-07 Jul-09 May-11 Mar-13

Euro area industrial production yoy(excl. construction)

*% yoySource: Eurostat

Industrial production Euro area*

-100

-50

0

50

100

Sep-07 Jan-09 May-10 Sep-11 Jan-13

Total plant and machinery ordersGermany (yoy)

*% yoySource: VDMA

DE: Total plant and machinery orders*

With minor exceptions, the Q2 13 reporting season brought decent results. Man-agement remarks generally pointed towards at least a stabilisation of trading conditions in H2, which also fits the observed improvement of many macro in-dicators. Hence, capacity utilisation rates should at least be maintained and as companies clearly remain focused on price discipline, this suggests that input cost inflation should not cannibalise profitability. Consequently, companies were able to confirm their full-year targets.

After having issuing a profit warning for FY 13e on the back of a cost overrun related to a pulp mill project in South America (in Q1 Andritz set aside a mid-dle double-digit EUR mn figure), Andritz did not create additional provisions in Q2 13, allowing the Pulp & Paper division to return to normalised operat-ing profitability levels. The company reported slight order intake growth and thanks to incremental contributions from Schuler, order backlog rose 10% to ca. EUR 7.6 bn or 1.3x FY 13e sales.

The main highlight in Semperit’s Q2 results was the better than expected profita-bility, particularly in the three industrial divisions. However, the management was vocal that industrial margins are at or at least close to peak levels, owing to the expected bottoming-out of raw material prices (which are still providing tailwind) and the emergence of incremental price pressure from customers. Hence, in line with our scenario, meaningful margin expansion in Semperflex, Semperform and Sempertrans is rather unlikely. Consequently, we regard a pricing inflection for rubber gloves as the main catalyst for the share price.

As in the preceding quarters, Palfinger’s top line performance was determined by growth of non-European operations, while European sales declined (organically). EBIT lived up to expectations at face value, however adjusted for a non-recurring revaluation gain earnings actually fell shy of expectations. Management remarks suggest a sequentially better top line momentum in H3 due to a recent uptick of the European order intake and confirmed the FY target of sales growth. However, we were left with the impression that reaching the EUR 1 bn threshold is more ambitious than after Q1.

Markus Remis

Q2 reporting generally brought solid results For H2 management remarks suggest at least stable trading conditions Confirmation of full-year targets

534th quarter 2013

Telecommunications

Sector comparison

Company Recommendation Target price P/E EV/EBITDA DY

2013e 2014f 2013e 2014f 2013e 2014f

Telekom Austria Hold EUR 6.40 18.3 18.5 5.4 5.2 0.9% 0.9%

Hrvatski Telekom UR UR 8.3 8.3 3.0 3.0 12.4% 11.8%

Magyar Telekom UR UR 6.6 6.9 3.6 3.7 15.5% 15.5%

Telefonica CR Hold CZK 340.00 15.0 15.3 5.3 5.4 9.6% 9.6%

TPSA Buy PLN 9.50 31.5 47.5 3.6 4.4 3.2% 3.2%

Netia Hold PLN 5.45 42.3 31.3 3.8 3.9 8.8% 8.8%

MegaFon Reduce USD 31.00 14.2 13.1 6.0 5.7 4.9% 5.2%

MTS Buy USD 24.20 12.7 11.7 5.4 5.2 7.1% 7.8%

VimpelCom Ltd Buy USD 13.50 10.6 9.8 4.4 4.2 7.2% 7.2%

Rostelecom Hold RUB 121.20 10.6 8.7 4.4 3.8 2.2% 2.6%UR = under revision Source: Raiffeisen Centrobank estimates

H2 13 will be dominated by potentially expensive mobile frequency auctions in Austria, Poland, the Czech Republic and Hungary. Ambitious reforms under EU consideration (incl. elimination of roaming charges) are adding to industry-wide uncertainty. Our Q3 expectations are muted and in the long term we expect a market consolidation. The performance of TA will be dependent on M&A news-flow (as recent developments surrounding America Movil/KPN are fuelling take-over phantasy) and market rumours of a potential capital increase in case of a bigger acquisition in the Balkans. In the Czech Republic there is a threat of entry of a fourth operator, with a price war being started by TCR in a pre-emptive move to make the market less attractive to a challenger. Magyar Telekom is still nego-tiating with the government with regard to regulation of the utility business, and faces a tax burden of HUF 32 bn in FY 13. The mood of cost-cutting continues with alliances being strengthened to share expenses: TCR is negotiating network sharing with T-Mobile, while TPSA and T-Mobile have extended their cooperation to 4G. TPSA is our preferred pick in CEE, as we consider the Polish market to be more mature after years of intense price war, while in other markets many chal-lenges still lie ahead. TPSA has launched a simplified offer through a new budget brand and we expect the new CEO to maintain a spirit of cost-cutting. In Russia, top-line growth should remain in mid-single digits, driven by data rev-enues, as the operators keep rolling out 3G/4G networks, while the growth rates in the handset retail business should subside. Rostelecom could probably see the biggest improvement in growth rates, as their cellular data business is growing from a low base, and they have been launching commercial 3G services during 2013, while the competitors are pragmatically launching LTE primarily in more commercially attractive regions. On the OIBDA margin level, Q3 is seasonally strong, due to the holiday season and higher roaming revenues, but we expect that MegaFon may report lower margins compared to H1 13, as the company has deferred some of its operating costs to H2 13, and the FY 13 guidance im-plies a margin decrease in H2 13. Finally, we believe that in case RUB continues to weaken vs. USD, investors’ interest may shift to export-oriented companies, and, coupled with the strong performance of telcos in Q1-3 13, we believe that they should not be able to outperform the market in Q4.

Jakub Krawczyk, Sergey Libin

Preparing to spend on frequencies

20%

30%

40%

50%

TA TPSA TCR* MTEL THT Netia

Q2 12 Q2 13

* OIBDA marginSource: Companies

EBITDA margin comparison, AT + CEE

20%

30%

40%

50%

MegaF. MTS Vimpel.* Rostel.

Q2 12 Q2 13

OIBDA margin comparison - Russia

Frequency auctions loom in H2 13, with the potential entry of newcomers EU regulation reform adds to uncertainty “Buy” recommendations: TPSA, VimpelCom, MTS

* EBITDA marginSource: Companies

54 4th quarter 2013

Equities – top picks

Recommendation: Buy Current share price: PLN 123.801 / Target price: PLN 150 Market capitalisation: EUR 5,882

We have recently upgraded our call on KGHM to ”buy” and included the Vic-toria Project (14.5 mn tons of resources with 2.5% copper, 2.5% nickel and 7.6 g/t of platinum, palladium and gold) into our valuation, after KGHM Interna-tional signed the deal with Vale regarding the ownership of the projects (KGHM will have 100%) in exchange for royalties paid to Vale (2.25% of revenues). The Victoria Project adds more than PLN 17 to our valuation and we believe the consensus would revise their valuation on those developments. Furthermore, fol-lowing the announcement of 2Q 13 figures few weeks ago, KGHM confirmed the commencement of copper and molybdenum production in its bigger project under development – Sierra Gorda in Chile) – as scheduled (2Q 14) and likely vs. the general expectations of delays.

Furthermore, see KGHM’s share price not reacting to the recent silver price in-crease from the lows of USD 18+/oz to USD 24+/oz. Historically, and par-ticularly this year, we have seen the share price following more the price levels of silver rather than copper price levels. Thus, we remain con-structive on some convergence and would expect a re-rating of KGHM’s valuation.

We are neutral on copper and see the market struggling with rebound-ing global macro indicators and par-ticularly in China (please refer to the recent import data as well as Chinese and European PMI) and the projected oversupply of the metal together with the current price being quite above the marginal production cost.

Bartlomiej Kubicki

Key ratios

in PLN 2012 2013e 2014f 2015f

EPS 24.01 15.36 12.06 15.33

PER 7.9 8.1 10.3 8.1

Operating CF per share 27.61 28.31 22.10 25.50

Price cash flow 6.9 4.4 5.6 4.9

Book value per share 108.33 118.10 122.95 132.54

Price book value 1.8 1.0 1.0 0.9

Dividend yield 5.2% 5.8% 4.6% 4.5%

ROE 21.5% 13.6% 10.0% 12.0%

ROCE 20.3% 12.6% 9.7% 11.4%

EV/EBITDA 4.2 3.3 3.8 3.7Source: KGHM, Raiffeisen Centrobank estimates

KGHM: Victoria Project to add some value

70

80

90

100

110

120

130

9 10 11 12 1 2 3 4 5 6 7 8 9

KGHM WIG 20

Source. Thomson Reuters

KGHM

1 the indicated price is the last price as available at 6.30 a.m. (CET) on 18 September 2013

Income statement & balance sheet (IFRS)

in PLN mn 2012 2013e 2014f 2015f

Income Statement

Consolidated sales 26,705.0 23,104.7 22,248.9 22,788.1

EBITDA 8,203.4 6,198.9 5,642.5 5,670.1

EBIT 6,594.0 4,546.5 3,856.3 3,722.6

EBT 6,448.0 4,338.0 3,546.3 4,192.8

Net profit b.m. 4,802.9 3,073.9 2,413.6 3,097.6

Net profit a.m. 4,801.9 3,072.9 2,412.6 3,066.2

Balance sheet

Total assets 33,992.0 35,086.6 37,061.1 39,170.4

Shareholders' equity 21,665.0 23,620.8 24,589.4 26,508.7

Goodwill 0.0 0.0 0.0 0.0

NIBD 80.0 -454.2 317.4 707.9Source: KGHM, Raiffeisen Centrobank estimates

554th quarter 2013

Key ratios

in EUR 2012 2013e 2014f 2015f

EPS 4.80 4.87 4.96 5.14

PER 10.4 10.3 10.1 9.7





Dividend yield 3.0% 2.9% 2.9% -3.1%

ROE 13.4% 12.2% 11.3% 10.8%

ROCE 13.3% 11.9% 11.1% 10.7%

EV/EBITDA 5.9 5.7 5.1 4.6Source: Krka, Raiffeisen Centrobank estimates


in EUR mn 2012 2013e 2014f 2015f

Income Statement


EBITDA 282.3 290.3 302.4 317.4

EBIT 192.3 196.3 202.7 207.2

EBT 190.5 196.8 200.9 208.3

Net profit b.m. 159.8 162.0 165.2 171.0

Net profit a.m. 159.8 162.0 165.2 171.0

Balance sheet

Total assets 1,626.7 1,817.8 1,901.1 2,029.9


Goodwill 0.0 0.0 0.0 0.0

NIBD -7.9 -26.6 -116.5 -197.9Source: Krka, Raiffeisen Centrobank estimates


95

100

105

110

115

120

125

130

9 10 1112 1 2 3 4 5 6 7 8 9

Krka SBITOP


Krka


Recommendation: Buy Current share price: EUR 50.001 / Target price: EUR 62.00 Market capitalisation: EUR 1,670 mn

As far as sales revenue is concerned, we continue to see a favourable market en-vironment in the CIS countries, especially in the company’s geographically larg-est single market – Russia. Krka boasted remarkable sales growth of 30% yoy from EUR 114.9 mn to EUR 143 mn in Russia in H1 13, fuelled above all by the expansion of its product range, the continuing extension of the distribution net-work into other Russian regions and strong growth of the pharma market at large by 6% yoy. Thanks to the Russian government’s plan to extend the coverage of the state’s reimbursement scheme for pharmaceutical products to all 82 regions of Russia, we reckon that Krka should be able to achieve strong sales growth of 14% and 10% yoy in Russia in the year 2013 as a whole and in 2014, respectively. As a result, according to our estimates, the group should be able to overcompensate for declining sales trends on the Slovenian home market and the SEE countries, which are mired by a difficult macroeconomic environment.

In terms of operating margin, we ex-pect a stabilisation at some 16% in 2013e and 2014e following the steep decline by roughly 17% last year (af-ter about -20% in 2011). The main reasons are continuing expansion of capacities in Russia (which should further reduce margin volatility due to currency fluctuations), additional effi-ciency improvement measures at the main plant in Slovenia and economies of scale in the wake of higher bulk production. Given that the operating margin improved by some 1.8%p yoy in H1 13, our estimate can be consid-ered conservative.

Based on our current estimates, we an-ticipate sales revenue of EUR 1.14 bn for 2013e, which translates into growth of 6.5% yoy. This is roughly in line with the management guidance (some 6%). We also expect a slight improvement in the result per share from EUR 4.80 in 2012 to EUR 4.87 in 2013e.

Daniel Damaska

Krka: Bullish market environment in CIS

56 4th quarter 2013

We decided to upgrade OMV to “buy” from “hold” on the back of the major upstream investment (USD 3.15 bn) announced by the company. We believe that (i) the newly added 320 mn boe of 2P reserves in regions with high political and fiscal stability, (ii) the immediate impact on upstream production (40 kboepd in 2014e), (iii) the upward revision of its 2016e production target from 350kboepd to 400 kboepd and (iv) the opportunity to further increase its upstream exposure in Norway fully justify a re-rating of the OMV stock. While we acknowledge the market’s concerns regarding the price paid (USD 10/boe of 2P reserves) and the quality of the assets acquired from Statoil, we believe that the price paid by OMV is a fair one and reflects the premium for the regions’ political and fiscal stability, as well as proximity to the European gas market. Moreover, the experience of Statoil in the redevelopment of offshore fields and its commitment to stabilise Gullfaks’s production (a mature field ac-

counting for cc. 60% of newly added 2P reserves) over the next period should reduce the risk of an abrupt output decline at Gullfaks. Despite its record size, the transaction will be funded mainly through OMV’s accu-mulated cash, therefore not putting at risk OMV’s credit rating, which was already affirmed by Fitch. Moreover, OMV intends to scale back its par-ticipation in Rosebank (an offshore oil field) from 50% (after acquisition) down to 30-35%. The divestment is expected to take place in Q1 14 and free some cash (we estimate EUR 300 mn). The acquired upstream assets are expected to turn into signifi-cant cash contributors in 2017-21e, which could be partially used to fund OMV’s investments in the Black Sea gas projects. All in all, we view the an-nounced acquisition as not only mak-ing sense from the strategic point of view, but also being value accretive, as long as the production targets are met and the price of Brent stays above the USD 100 level.

Oleg Galbur



Key ratios

in EUR 2012 2013e 2014f 2015f

EPS 4.18 6.35 4.44 5.13

PER 6.5 5.7 8.2 7.1





Dividend yield 4.4% 3.4% 3.6% 4.1%

ROE 11.9% 16.2% 10.3% 11.0%

ROCE 10.8% 14.2% 10.4% 10.7%

EV/EBITDA 3.4 3.2 3.7 3.4Source: OMV, Raiffeisen Centrobank estimates

90

100

110

120

130

140

150

9 10 1112 1 2 3 4 5 6 7 8 9

OMV ATX


OMV

OMV: Improving the risk profile of its upstream portfolio



in EUR mn 2012 2013e 2014f 2015f

Consolidated sales

EBITDA 42,649.2 41,461.6 42,076.5 43,786.8

EBIT 5,088.9 5,899.0 5,563.0 5,926.1

EBT 3,103.7 4,109.6 3,439.6 3,737.1

Net profit b.m. 2,857.5 3,913.9 3,247.9 3,555.2

Net profit a.m. 1,790.5 2,597.8 2,013.7 2,204.2

Balance sheet 1,363.4 2,069.6 1,446.8 1,674.5

Total assets


Goodwill 11,902.5 13,580.7 14,619.8 15,870.3

NIBD 1,137.0 1,137.0 1,137.0 1,137.0

NIBD 3,561.7 1,688.9 3,995.3 3,535.6Source: OMV, Raiffeisen Centrobank estimates

574th quarter 2013

For the share of Oesterreichische Post (the Austrian Post) we identify three short- to mid-term triggers which make the stock an interesting investment case, in our view: 1) Austrian parliamentary elections at the end of September should have a visible positive effect on letter mail volumes (campaigning, postal voting), 2) the plans to IPO the English Royal Mail should also put light on the investment case behind the Austrian Post (a scenario being visible also during the IPO of bpost of Belgium in spring this year) and 3) a very strong Q2 13 result which again showed the strong earnings development of the company.

After a strong earnings beat on a clean basis in Q2 13 we upgraded the share of the Austrian Post from “hold” to “buy” lifting our TP from EUR 33.50 to EUR 37.00. Higher than expected efficiency improvements, especially within opex, as seen in H1 13 in our view justify an increase in our clean EBITDA forecast by 7% and 9% for this and next year, respectively. Further mid-term earnings support comes from a new attempt to restructure the German parcel business. Mid-term margin targets of 3.5% to 4.0% could improve earnings by around EUR 15 mn. DPS 13e of EUR 1.90 looks safe and the latest acquisition in Turkey (25% stake in Aras Kargo) appears to be a good move.

Although reported Q2 13 figures were in-line with market expectations, slightly topping our forecast, we es-pecially want to point out a strong earnings beat on an adjusted basis. Material & service expenses and other operating expenses undershot our assumptions. Looking at individual segment trends we positively point to continuing robust Letter Mail trends (+1.5% yoy), partially supported by one regional election (Salzburg) in Q2.

Bernd Maurer

Key ratios

in EUR 2012 2013e 2014f 2015f

EPS 1.82 2.19 2.26 2.42

PER 17.1 14.9 14.4 13.5





Dividend yield 5.8% 5.8% 6.1% 6.4%

ROE 17.5% 20.5% 20.4% 21.1%

ROCE 17.0% 20.7% 20.6% 21.3%

EV/EBITDA 6.7 7.0 6.9 6.6Source: Oesterreichische Post, Raiffeisen Centrobank estimates

Oesterreichische Post: Visible progress on the cost side


in EUR mn 2012 2013e 2014f 2015f

Income Statement


EBITDA 285.1 290.7 289.9 300.6

EBIT 196.3 196.8 199.9 210.6

EBT 151.6 188.5 195.7 209.5

Net profit b.m. 123.2 148.3 152.6 163.4

Net profit a.m. 123.2 147.7 152.6 163.4

Balance sheet

Total assets 1,700.9 1,709.7 1,731.6 1,744.8

Shareholders' equity 708.6 734.7 758.9 787.2

Goodwill 183.5 236.0 236.0 236.0

NIBD -369.3 -309.6 -341.4 -359.9Source: Oesterreichische Post, Raiffeisen Centrobank estimates


90

95

100

105

110

115

120

125

9 101112 1 2 3 4 5 6 7 8 9

Österreichische Post ATX


Oesterreichische Post



58 4th quarter 2013


Despite continuing weakness on the DAP (Diammonium phosphate) market as a result of depreciated currencies in emerging countries such as India, Brazil, Indonesia, Malaysia, we think that the flexibility of PhosAgro’s business model (switching from production of phosphate fertilizers to complex nutrients) will en-able the company to pass this tough time with minimum damage as compared to other phosphate producers. Moreover, the price recommendations from the Antimonopoly watchdog for local supplies of phosphate rock have significantly improved the profitability of sales to Russian non-integrated phosphate and com-plex fertilizers producers and should partly offset the negative impact of revised global pricing conditions for DAP.

We also stress that the company keeps delivering healthy financial results despite DAP market fluctuations, thanks to the strategic shift of production towards less vulnerable NPK/NPS (Nitrogen, Phosphorus, Potassium/Nitrogen, Phosphorus, Sulphur) products. In addition, PhosAgro will win from the “potash divorce” of

Uralkali and Belaruskali as potash is one of the raw materials for NPK pro-duction, so since local pricing for pot-ash is linked to export netbacks, the lower the export price, the lower the cost of raw materials for producers. So even if NPK prices decline (though they are more stable and unlikely to drop by the same 20-25% by the end of the year), profitability of NPK pro-duction could increase due to faster and deeper potash price drops com-pared to NPK.

On the corporate front, we appreci-ate the company’s efforts to act in line with promises made during its IPO and the last Capital Markets Day: the consolidation of subsidiaries is virtually over, which should trigger dividends as a result of a reduction of minorities in net income; FCFF yield is still high since the company is care-fully managing its debt position and capex spending; MSCI Russia entry is only a matter of time, so we think it is now a good opportunity to buy the stock ahead of entry. We reiterate our “Buy” call on the stock with a target price of USD 18.20 per GDR.

Konstantin Yuminov

Key ratios

in RUB 2012 2013e 2014f 2015f

EPS 165.9 61.1 64.2 66.2

PER 7.5 5.2 4.9 4.8





Dividend yield 6.1% 7.7% 8.1% 8.4%

ROE 42.2% 36.0% 31.0% 26.8%

ROCE 25.5% 23.4% 23.8% 23.2%

EV/EBITDA 5.1 3.6 3.2 2.8Source: PhosAgro, Raiffeisen Centrobank estimates

PhosAgro: Well prepared to pass tough times


in RUB mn 2012 2013e 2014f 2015f

Income Statement

Consolidated sales 105,303 111,784 118,766 125,870

EBITDA 34,695 35,359 37,257 38,261

EBIT 28,174 28,326 29,744 30,305

EBT 31,214 29,151 30,689 31,738

Net profit b.m. 24,510 23,321 24,551 25,391

Net profit a.m. 20,654 22,821 23,972 24,732

Balance sheet

Total assets 115,627 124,912 126,227 136,946

Shareholders' equity 60,416 70,030 84,874 100,017

Goodwill 0 0 0 0

NIBD 26,805 17,300 6,154 -4,109Source: PhosAgro, Raiffeisen Centrobank estimates

65707580859095

100105110115

9 10 11 12 1 2 3 4 5 6 7 8 9PhosAgro Micex


PhosAgro

Recommendation: Buy Current share price: USD 9.821 / Target price: USD 18.20 Market capitalisation: EUR 2,748 mn


594th quarter 2013

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Sour

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Equities – region overview

60 4th quarter 2013


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634th quarter 2013

Energy16.33%

Materials12.35%

Telecommunications2.83%

Utilities9.48%

Banks39.36%

Consumer staples3.59%

Insurance13.21%

Media0.00%

Real Estate0.91%

Software & Services1.93%

Sector weightings Poland, WIG 20

Dom. market cap.: EUR 135,7 bn (Source: FESE; 31-August-13)


Energy1.12%

Materials2.93%


Utilities18.32%

Banks40.67%Food Beverage

& Tobacco1.97%

Consumer Durables1.64%

Hotels, Restaurants, Leisure 1.90%

Media2.07%

Insurance19.97%

Sector weightings Czech Republic, PX1

1 excl. Orco PropertySource: Thomson Reuters, Raiffeisen RESEARCH

Sector weightings Hungary, BUX Sector weightings Russia, MICEX

Sector weightings Romania, BET Sector weightings Turkey, ISE 100

Sector weightings in comparison


Energy31.63%

Materials0.22%


Financials30.58%

Pharma & Biotechnology

26.53%

Software & Services0.11%

Commercial Services (incl. Hotels, Restaurants)

0.85%Capital Goods

0.22%


Energy51.93%

Materials10.92%


Utilities2.60%

Financials17.84%

Retailing6.71%

Transportation0.29%

Consumer Durables0.16%

Automobiles 0.12%

Pharma & Biotechnology0.40%

Capital Goods0.19%

Dom. market cap.: EUR 535,7 bn (Source: WFE; 31-August-13)

Source: Thomson Reuters, Raiffeisen RESEARCH Source: Thomson Reuters, Raiffeisen RESEARCH

Energy27.01%

Utilities3.61%

Financial44.15%

Industrials1.22%


3.60%

Investment Funds20.42%

Dom. market cap.: EUR 24,6 bn (Source: BSE; 31-August-13)

Energy3.98%

Materials6.13%


Utilities0.68%Financials

(Banks incl.Insurance)47.82%

Industrials15.24%

Consumer discretionary

5.66%

Consumer staples12.95%


0.27%

Technology Hardware 0.16%

Hotels, Restaurants, Leisure0.27%


Source: Bloomberg, Raiffeisen RESEARCH Source: Thomson Reuters, Raiffeisen RESEARCH


64 4th quarter 2013

ATX


BELEX 15


BUX


ATX & MICEX: Regime shift ahead?

Technical analysis

ATX

Last 2,491 buy 2,590 Target 2,680 –2,750

Since the beginning of 2013 it has moved sideways, moreover, the pattern’s resistance has not yet been crossed through. This would enhance rather the expec-tation of another setback to follow, but the uptrend has proven firm the last test. Thus chances for a Measured-Move are not that bad, stop 2,250.

Price as of 17 September 2013, 02:52 p.m. CET

BELEX 15

Last 523.14 sell 510.00 Target 491.00 – 475.00

The ongoing rebound is just hitting resistance i.e. the interim bullish trend-channel’s resistance and the 50 % Retracement. Therefore, we expect a pullback to follow which would continue till it hits the long-term support area, sell 510.00 -> 491.00 – 475.00, stop 544.00.

Price as of 17 September 2013, 02:40 p.m.CET

BUX

Last 18,467 Position: neutral

It continues oscillating within the congestion area; in ad-dition, the upward support has been crossed through. However, neither the resistance at 19,650 nor the support at 17,640 is expected to breach for now. Consequently, both directions seem to be valid alternatives, thus the re-spective triggers should be paid attention, sell 17,250 -> 15,660; buy 20,100 -> 21,040.

Price as of 17 September 2013, 03:58 p.m.CET

Ar = arithmetic scale

654th quarter 2013

Technical analysis

CROBEX


MICEX


WIG 20


CROBEX 10

Last 1,026 sell 1,015 Target 987.00

Although it is still moving sideways it seems to respect the long-term downtrend-line (brown). As a consequence, expectations for a downside-breakout are enhanced, sell 1,015 -> 987.00, stop 1,050.


MICEXLast 1,472 Position: long Target 1,520 – 1,600

A Head & Shoulders bottom (blue arrows) has been com-pleted; therefore, the long-term downtrend-line is likely to get tested out. Accordingly, the next resistance is at 1,520 whose breach would clear the path for 1,600. Stop 1,370.


WIG 20

Last 2,412 Position: neutral

The WIG moves well bounded between the bearish trend channel’s constraints. Thus, we cannot anticipate a break-out to the upside; buy 2,530 -> 2,750; and the rating remains neutral; sell 2,120 -> 2,000 – 1,970.


Ar = arithmetic scale

Stefan Memmer

66 4th quarter 2013

Risk factors and sentiment

Quantitative analysis

Beta to MSCI World and MSCI EM

Beta: Measures the sensitivity of an equity index to changes of a factor (MSCI World and MSCI EM) Beta > 1: The equity index shows larger swings then the factor.

Up-Beta: Measures the sensitivity of an equity index to positive changes of a factor (MSCI World and MSCI EM).Up-beta > 1: The equtiy index rises more then the factor in positive periods.

Down-Beta: Measures the sensitivity of an equity index to negative changes of a factor (MSCI World and MSCI EM). Down-beta > 1: The equtiy index decreases more then the factor in negative periods.

Beta to MSCI World

Beta Up-Beta Down-Beta Up-DownEM Europe 1.11 1.00 1.16 -0.16

Czech Rep. 0.36 0.29 0.63 -0.34

Poland 0.90 0.97 0.99 -0.02

Russia 1.24 1.13 1.30 -0.18

Hungary 0.76 1.07 0.56 0.51

Betas to MSCI World; weekly returns of the last 2 yearsSource: Thomson Reuters, Raiffeisen RESEARCH

Beta to MSCI EM

Beta Up-Beta Down-Beta Up-DownEM Europe 1.14 1.02 1.17 -0.15

Czech Republic 0.45 0.53 0.36 0.17

Poland 0.92 0.93 0.75 0.17

Russia 1.25 1.19 1.32 -0.14

Hungary 0.63 0.77 0.35 0.42

Betas to MSCI EM; weekly returns of the last 2 yearsSource: Thomson Reuters, Raiffeisen RESEARCH

RBI R

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0.15

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RBI Risk Indicator 150−Days EMA

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Implicit Volatility Spreads Banks CDS Spreads Total Change

Equit

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0.95

1.05

1.15

Equit

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0.95

1.05

1.15

Benchmark RBI Risk Indicator Strategy

10/12 11/12 12/12 01/13 02/13 03/13 04/13 05/13 06/13 07/13 08/13 09/13

RBI Risk Indicator


RBI Risk Indicator

The RBI Risk Indicator is a quantitative indicator that serves primarily as a short-term decision support instrument for high-risk investments. The timing-rule goes as follows: An index sinking below the 150-day moving average (i.e. in the case of a fall-ing level of risk aversion) equals a buy-signal for shares. The opposite case should be interpreted as a sell-signal. Generally speaking, high RBI Risk Indicator values imply a very low risk appetite and high risk premiums. Please refer to the special publication ‚New Edition of the RBI Riskindicator’, published on April 8, 2013, for a detailed description.

674th quarter 2013

Cut-off for data: 17 September 2013This report was completed on 24 September 2013

Acknowledgements:Editor: Raiffeisen RESEARCH/RBI GroupA-1030 Vienna, Am Stadtpark 9, Telephone: +43 1 717 07-0, Telefax +43 1 717 07-1848Published by: Raiffeisen RESEARCH GmbH, 1030 Vienna, Am Stadtpark 9. Published and manufacured in ViennaPrinted by: Holzer Druck, 1100 Wien, Buchengasse 79Cover photo: wjarek/panthermediaDesign: Kathrin Rauchlatner, Birgit Bachhofner, Marion Stadler

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ViennaAaron AlberJörg AngeléJörg BayerEva BauerBjörn ChybaGunter DeuberWolfgang ErnstChristian HinterwallnerValentin HofstätterStephan ImreChristoph KlaperIgor KovacicDagmar KönigLydia KrannerNina Neubauer-KukicMartin KutnyVeronika LammerJörn LangeHannes LoackerRichard MalzerAndreas MannsparthJohannes MattnerStefan MemmerChristine Nowak

Peter OnofrejHelge RechbergerMatthias ReithElena RomanovaLeopold SalcherAndreas SchillerRobert SchittlerAndreas SchwabeConnie SchümannManuel SchusterGintaras ShlizhyusLubica SikovaAlexander SkleminGottfried SteindlMartin StelzenederStefan TheußlMagdalena WasowiczJürgen Walter

Albania Joan CanajValbona Gjeka

BelarusOleg LeontevVasily Pirogovsky Olga LaschevskayaMariya Keda

Bosnia & Herzegovina Ivona ZameticaSrebrenko Fatusic

BulgariaHristiana Vidinova

CroatiaAnton StarcevicZrinka Zivkovic MatijevicIvana Juric Nada Harambasic-NereauAna FraninElizabeta Sabolek Resanoviæ

Czech RepublicMichal BrozkaVaclav FranceHelena HorskaLenka Kalivodova

HungaryZoltán TörökÁdám KeszegLevente Blahó

KosovoFisnik Latifi

PolandMarta Petka-ZagajewskaDorota StrauchTomasz RegulskiPawe³ RadwañskiPiotr JelonekMichal Burek

RomaniaIonut DumitruNicolae Covrig Gabriel BobeicaAlexandru CombeiIuliana MocanuAlexandru Neagu

RussiaAnastasia BaykovaDenis PoryvayAnton PletenevMaria PomelnikovaRita TsovianIrina AlizarovskayaKonstantin YuminovSergey LibinAndrey PolischukFedor KornachevNatalia Kolupaeva

SerbiaLjiljana Grubic

SlovakiaRobert PregaJuraj ValachyBoris Fojtik

SloveniaPrimoz Kovacic

UkraineDmytro SologubLudmila ZagoruykoOlga Nikolaieva

Company ResearchStefan Maxian (Head)

Daniel DamaskaNatalia FreyOleg GalburMario GallopJakub KrawczykBartlomiej KubickiBernd MaurerDominik NiszczMarkus RemisTeresa SchinwaldJovan SikimicIryna Trygub-Kainz

Global Raiffeisen RESEARCH Team: Peter Brezinschek (Head)

68 4th quarter 2013

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