ECONOMIC & STRATEGY RESEARCH 17 June 2019 Semiannual report Extract from a report Equity Outlook Global uncertainties continue to stoke fears © iStock The first months of the year were positively influenced by global equity markets’ recovery after selloffs at the end of 2018: In December 2018, equity markets suffered from severe selloffs, which decreased the price basis and allowed for a decent rebound. This was supported by the wait for conclusion of a trade agreement between the United States and China. May was highlighted by another selloff: This happened primarily due to the temporary failure of trade negotiations with China. The relationship between the US and China is still quite cold. Another drop in global stock indices was caused by US President Donald Trump’s threats of imposing import tariffs on Mexican goods. June brought a solution to the Mexican tariffs so markets could rebound and cover May’s losses. Outlook for the second half of the year is not rosy: With low visibility of the outcome of the trade war and Brexit, and a recession expected in the US in mid-2020, Société Générale further reduced the risk profile of its global asset allocation portfolio. We see a downside potential to global equity indices. Sectoral composition: We are more directed toward defensive stocks again, with a focus on quality earnings and solid higher dividend yielders. Utility, beverages and real estate are the sectors with a new Overweight recommendation. Prague Stock Exchange: We believe the PX index is able to surpass developments of West European competitors and achieve double-digit growth this year. Miroslav Frayer Jiří Kostka (420) 222 008 567 (420) 222 008 560 [email protected] [email protected] Please see back page for important disclaimer Date and time of the compilation: 17 June 2019, 2:40 PM Economic & Strategy Research Equity Outlook Prague Stock Exchange statistics 2014 2015 2016 2017 2018 5/2019 PX Index (eoy) 947 956 922 1,078 987 1,044 Change (CZK) -4.3 1.0 -3.6 17.0 -8.5 5.8 Change (USD) -16.7 -7.0 -6.9 41.1 -13.6 2.8 Traded volumes (CZK m) 158,222 169,202 163,580 140,741 142,125 50,366 Traded volumes (USD m) 7,648 6,941 6,687 6,002 6,557 2,213 Market capitalization (CZK m) 1,018,162 1,011,989 1,020,891 1,208,467 1,095,553 1,158,362 Market capitalization (USD m) 44,434 40,696 39,844 56,888 48,753 50,051 Source: PSE, Bloomberg, Economic & Strategy Research, Komerční banka KB/SG recommendations for the PSE titles Company Price Target price Recomm. From date Year high Year low Avast 89.0 98.5 Buy 14.VI.18 95.0 62.5 CEZ 544.5 717.0 Buy 10.VI.19 585.0 514.0 CME 93.0 117.9 Buy 28.III.19 95.0 62.0 Erste Bank 820.6 1,178.1 Buy 6.V.19 936.5 681.0 Kofola 291.0 484,0 Buy 26.IX.18 373.0 267.0 Komercni banka 904.0 - - - 964.5 812.5 Moneta Money Bank 76.5 97.0 Buy 2.III.19 82.8 70.0 O2 CR 225.5 298.0 Buy 12.XII.18 261.9 212.8 PFNonwovens 740.0 924,0 Buy 26.X.18 940.0 734.0 Philip Morris CR 13,660.0 18,308.0 Buy 3.XII.18 15,920.0 13,360.0 Stock Spirits 66.0 - - - 71.9 55.2 VIG 591.5 668.0 Buy 11.IX.18 652.0 512.0 Source: PSE, Bloomberg, Economic & Strategy Research, Komerční banka; *prices as of 17 June 2019, 9:08 am CET Companies overview Price Monthly year-to-date change Avg. daily volumes CZK change CZK USD 1-5/2019 1-5/2019 Company 17-Jun-19 (%) (%) (%) (CZK m) (USD m) Avast 89.0 -2.7 9.2 7.5 6.4 0.3 CEZ 544.5 3.5 1.8 0.2 127.7 5.6 CME 93.0 9.3 49.3 47.0 11.3 0.5 Erste Bank 820.6 -1.6 14.6 12.9 76.6 3.4 Kofola 291.0 -4.0 2.8 1.3 2.1 0.1 Komercni banka 904.0 6.1 6.7 5.1 127.4 5.6 Moneta Money Bank 76.5 5.7 5.5 3.9 89.9 3.9 O2 CR 225.5 -8.2 -4.8 -6.2 15.1 0.7 PFNonwovens 740.0 -0.8 -8.2 -9.6 1.7 0.1 Philip Morris CR 13,660.0 -0.7 -3.0 -4.5 20.8 0.9 Stock Spirits 66.0 -2.9 7.5 5.9 1.0 0.0 VIG 591.5 -4.6 12.2 10.5 4.2 0.2 Source: PSE, Bloomberg, Economic & Strategy Research, Komerční banka; *prices as of 17 June 2019, 9:08 am CET Economic & Strategy Research Equity Outlook Fresh wind at the beginning of this year Jiří Kostka The first half of this year showed signs of a stock market recovery, with the first quarter (420) 222 008 560 being the best period. There was a downward correction in May, which is currently [email protected] being erased by growing markets. The global MSCI index gained more than 12% in 1H19. Shares of developed markets were slightly better with gains amounting to more than 13%. Especially the May selloff caused the MSCI for emerging markets to gain slightly above 6%. Looking at specific regions, the Japanese Nikkei 225 (gained 8%) was worse than the global MSCI index. A comparable performance to MSCI World was shown by the European Global equity market Stoxx 600 index, which rose around 12%. As is often the case, the absolute winner was the 540 American S&P 500 index. It grew at a faster pace than other indices for the whole period and 520 especially at the end of 1H it was able to recover faster and more energetically from May’s selloff. This led to growth of almost 15%. 500 480 Development of main equity indices in 1H19 (1 January 2019 = 100) 460 MSCI World MSCI Emerging MSCI Developed 120 440 I-19 II-19 III-19 IV-19 V-19 VI-19 Source: Bloomberg, MSCI World index 115 110 105 100 95 I-19 II-19 III-19 IV-19 V-19 VI-19 Source: Economic & Strategy Research, Komerční banka, Bloomberg; *data as of 14 June 2019 Until May, equity markets were It ought to be mentioned that equity markets had perfect conditions for a successful expecting an end to the trade war start to the new year, as at the end of last year there was a severe selloff on global between the United States and China. equity markets. In January alone, almost all main global equity indices grew approximately 7%. In the first few months of this year, hopes for a trade agreement between the United States and China helped markets to grow. There was a constant inflow of positive news regarding trade negotiations, and everything signalled an end to the trade war. Nevertheless, at the beginning of May, equity markets experienced a cold shower as US President Donald Trump announced plans to increase import tariffs on Chinese goods in the amount of $200m from 10% to 25% within a couple of days. At the same time, Trump also threatened to impose a new 25% tariff on remaining Chinese imports in the amount of $325m. The reason for these announcements was the alleged effort by China to renegotiate certain parts of the trade agreement that Trump considered unacceptable. Unfortunatelly, since then, the relationship between the two countries has deteriorated significantly. Mutual accusations as who is responsible for not reaching a trade agreement followed, which led to increased tension. Within a couple of days the inevitable happened and the United States increased import tariffs on Chinese goods to 25%. China retaliated almost immediately by increasing import tariffs from 5% and 10% for different types of goods to a united 25% for American goods in a total amount of $60m. 17 June 2019 3 Economic & Strategy Research Equity Outlook May showed signs of increased At the end of May, a well-known factor The fear index volatility and selloffs due to the appeared in the inverse bond curve, where temporary failure of trade VIX Index negotiations with China. the difference between the three-month rate 50 and the 10-year yield fell to its lowest level 40 since March. An inverse bond curve has 30 been an omen of recessions in the past. To make matters worse, at the beginning of 20 June, Trump turned his attention to Mexico 10 and threatened to impose 5% import tariffs 0 on all Mexican goods starting on 10 June. I-18 IV-18 VII-18 X-18 I-19 IV-19 These tariffs could reach up to 25% by Source: Bloomberg October, i.e. 5% monthly growth. The reason for this threat, according to Trump, is unresolved immigration policy in Mexico. Within a week, the two countries found a solution for this issue and Trump revoked his plan for tariffs. Since then, nothing has stood in the way of the wave of optimism on equity markets, which began to correct May’s selloffs. The situation in May is clearly captured by the VIX index, which shows the volatility of markets, i.e. uncertainty and fear among investors. Comparison of stock indices in 1H19 (%) YTD in CZK 15 10 5 0 -5 -10 PX WIG20 BUX MSCI Stoxx600 S&P500 Nikkei225 MSCI World Emerging Source: Economic & Strategy Research, Komerční banka, *data as of 14 June 2019 The Prague Stock Exchange is The development on the Prague Stock Exchange was in line with global markets with a still ahead of its regional peers.