ECONOMIC & STRATEGY RESEARCH 10 April 2017 Equity Research Extract from a report Equity Outlook Global equity market gets the green light ■ The global stock market followed its successful final quarter of last year and Miroslav Frayer shares also grew in 1Q17. The MSCI world equity index has increased more than (420) 222 008 567 miroslav_ frayer @kb.cz 6% since the beginning of the year. Richard Miřátský ■ The PSE’s PX index has slightly surpassed the performance of major U.S. and (420) 222 008 560 [email protected] European indexes. It has added more than 6% since January. In comparison with Jana Steckerová regional competitors, the Polish WIG20 became a clear winner, jumping 15%. On the (420) 222 008 524 jana _steckerova @kb.cz contrary, the Hungarian BUX’s profit of less than 1.5% has not enthused investors. ■ A positive for the PSE is the fact that we have found no company whose shares remained in the red in the first quarter of the year. Shares of petrochemical group Unipetrol became a clear winner, on the contrary, the largest issuance, CEZ, added the smallest gains from the Prague peloton. ■ The average daily trading volume for the past two quarters was more volatile. Nevertheless, it is evident that Moneta Money Bank’s entry supported trading activity on the domestic market. For the first three months, the newcomer became the No. 1 among the most traded stocks on the Prague Stock Exchange. ■ SG increased the weight of equities in its global portfolio from 58% to 63%. Improving macroeconomic environment, reflation and the structural switch from monetary to fiscal policy impetus in developed countries are strong incentives for investors to switch out of expensive bonds into equities. ■ We maintain a positive stance on most stock indices for this year. With major indexes at their record heights, the US equities look overpriced with limited upside. Once political uncertainties fade away, European equities that trade at 47% price to book discount compared with their US counterparts, should provide strong growth potential. ■ Our most preferred sectors include automobiles & parts, construction & materials, financial institutions and newly also Aerospace & defence. On the contrary, telecommunications and utilities belong among our least preferred sectors. ■ The PSE could deliver a return of 6-7% in the next 12 months. We believe financial stocks are among the most attractive. From other stocks under our coverage, we recommend buying Pegas Nonwovens, Philip Morris CR and CME. Please see back page for important disclaimer. Economic & Strategy Research Equity Research Prague Stock Exchange statistics 2012 2013 2014 2015 2016 03/2017 PX Index (eoy) 1,039 989 947 956 922 981 Change (CZK) 14.0 -4.8 -4.3 1.0 -3.6 6.5 Change (USD) 18.4 -8.9 -16.7 -7.0 -6.9 8.0 Traded volumes (CZK m) 250,608 184,571 158,222 169,202 163,580 41,239 Traded volumes (USD m) 12,810 9,461 7,648 6,941 6,687 1,626 Market capitalization (CZK m) 1,093,799 1,074,426 1,018,162 1,011,989 1,020,891 1,091,333 Market capitalization (USD m) 57,540 54,189 44,434 40,696 39,844 43,204 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 CEZ 431.1 448.0 Hold 14.IX.16 477.2 387.0 CME 74.3 88.4 Buy 10.III.17 81.8 49.0 Erste Bank 816.0 931.4 Buy 1.III.17 840.0 480.1 Fortuna 105.5 96.0 Hold 20.V.16 110.0 74.2 Kofola 402.7 - - - 436.8 353.0 Komercni banka 946.8 - - - 1,039.8 808.6 Moneta Money Bank 88.1 90.0 Buy 6.IX.16 90.8 68.0 O2 CR 291.8 267.0 Hold 8.XII.16 292.2 197.3 Pegas Nonwovens 835.9 863.0 Buy 20.V.16 853.1 702.5 Philip Morris CR 13,870.0 13,500.0 Buy 13.VI.16 13,900.0 11,910.0 Stock Spirits 57.4 - - - 59.5 45.0 Unipetrol 231.0 - - - 235.0 155.0 VIG 608.5 691.0 Buy 3.III.17 642.2 411.0 Source: PSE, Bloomberg, Economic & Strategy Research, Komerční banka Companies overview Price Monthly year-to-date change Avg. daily volumes CZK change CZK USD 1-3/2017 1-3/2017 Company 7-Apr-17 (%) (%) (%) (CZK m) (USD m) CEZ 431.1 -4.6 0.3 3.0 145.2 5.8 CME 74.3 -5.4 11.6 14.6 2.2 0.1 Erste Bank 816.0 4.5 7.6 10.5 76.8 3.1 Fortuna 105.5 4.2 23.0 26.3 5.9 0.2 Kofola 402.7 -0.8 9.8 12.7 1.2 0.0 Komercni banka 946.8 1.9 7.0 9.9 139.5 5.6 Moneta Money Bank 88.1 2.4 6.3 9.2 153.0 6.1 O2 CR 291.8 7.3 12.3 15.3 67.4 2.7 Pegas Nonwovens 835.9 -1.6 8.7 11.6 8.6 0.3 Philip Morris CR 13,870.0 2.6 5.9 8.8 9.2 0.4 Stock Spirits 57.4 4.4 1.7 4.4 1.3 0.1 Unipetrol 231.0 5.7 25.7 29.1 8.4 0.3 VIG 608.5 -2.8 5.8 8.6 15.5 0.6 Source: PSE, Bloomberg, Economic & Strategy Research, Komerční banka Economic & Strategy Research Equity Research The PSE entered the year with decent growth Global equity market The global stock market followed its successful final quarter of last year and shares also 460 grew in 1Q17. The MSCI world equity index has improved more than 6% since the beginning of the year. This development was attributed mainly to persisting favourable economic trends. 448 Shares are driven up by anticipated expansionary U.S. fiscal policy with a significant 436 investment in infrastructure and a reduction of regulation after Donald Trump became 424 president in January. Neither the Fed’s decision to raise interest rates nor growing 412 speculations on faster monetary policy tightening has halted rising stocks. Only 15 of the 96 major indices tracked by Bloomberg have headed downward. The main U.S. index, S&P 500, 400 VII-16 IX-16 XI-16 I-17 III-17 and the European Stoxx 600 index have added roughly 5% since the beginning of the year. Source: Bloomberg, MSCI World index Thus, emerging markets in particular have pulled up the global equity index. The MSCI Emerging Index rose more than 12% in 1Q17. One of the few unprofitable indexes is the Japanese Nikkei 225, which has given up 2.7% since the beginning of the year. The main cause was the Japanese yen, strengthening against the U.S. dollar since January by more than 5%, which worsened the performance of local exporters especially. Development of main equity indices from the beginning of the year S&P 500 Stoxx Europe 600 MSCI World Index MSCI Emerging Index 115 111 107 103 99 95 30-XII. 9-I. 19-I. 29-I. 8-II. 18-II. 28-II. 10-III. 20-III. 30-III. Source: Economic & Strategy Research, Komerční banka, Bloomberg; *data as of 7 April 2017 The Prague PX index has added The PSE’s PX index has slightly surpassed the performance of major U.S. and European more than 6% and beats the indexes. It has added more than 6% since January. In comparison with regional competitors, world's major stock indexes. the Polish WIG20 became a clear winner, jumping 15%. On the contrary, the Hungarian BUX’s profit of less than 1.5% has not enthused investors. The end of the CNB’s FX Waiting for the end of the CNB’s FX commitment was a story on Czech financial markets from commitment should not the beginning of the year. This happened on 6 April. The exit did not affect the Prague stock significantly influence the domestic stock market. market significantly. In an immediate reaction, we could see larger movements only of stocks with dual listings in Prague, where shares of Erste and VIG dropped in the Czech crown. We do not think abandonment of the CNB’s instrument should have a significant impact on stock prices or, respectively, company results. It is difficult to pinpoint a company that would significantly profit from this decision. Most companies operate either on the domestic market or earn a small percentage of revenue abroad. The following several factors lead us to this conclusion: First of all, it is mainly about how much CZK will strengthen. Second, we have already incorporated a gradual strengthening of the Czech crown into our models. Finally, it is necessary to say that companies use natural or financial hedging to a large extent, which eases the impact of further CZK appreciation. 10 April 2017 3 Economic & Strategy Research Equity Research Overall, we think the strengthening will have no substantial impact on the performance of companies. The share price impact can be observed in companies that have a dual listing in Prague and a main trading market abroad. There, with CZK strengthening and the same EUR price, stock prices in CZK will fall to avoid arbitration trades. PX vs. other stock indices in 2017 (%) Prague stocks in 2017 (%) 30 30 year to d ate in CZK te rms 25 20 20 15 10 10 5 0 0 PX KB O2 VIG -10 CEZ CME Erste UNIP Stock Pegas Kofola PX WIG20 BUX Stoxx600 S&P500 Nikkei225 PMCR Moneta Fortuna Source: Economic & Strategy Research, Komerční banka, Bloomberg Unipetrol, CME and Fortuna A positive for the PSE is the fact that there has been no company whose shares formed the trio of the most remained in the red in the first quarter of the year.