Russia/Eastern Europe: growth in Putin’s shadow

Russian equities had their appeal: Gazprom and Lukoil lured with high dividend yields. Consumer stocks such as Magnit PAO, the online retailer Ozon Group or Sberbank promised decent price gains. But on February 28, the Moscow stock exchange closed. Russian stocks, which had previously plummeted in response to Western sanctions, were unable to buy or sell for nearly a monthbecome ft. Just a few days ago, the stock exchange opened trading in around 30 blue-chip stocks. But only for domestic investors. However, the catastrophe predicted by US President Joe Biden did not materialize. The Russian government had supported the courses.

Foreign investors, on the other hand, are prohibited from participating in Moscow until further notice. They also do not have access to Russian stocks on the London, New York and Frankfurt stock exchanges. In addition, MSCI, FTSE and Stoxx have reacted to Russia’s war against Ukraine by removing Russian securities from their indices. Pure Russia funds and Eastern Europe funds with a high proportion of Russia, such as DWS Russia or UniEM Eastern Europe, are also closed. €uro am Sonntag has therefore temporarily removed these funds from the course section.

It is not yet possible to say when investors will be able to get their money back. A number of legal issues currently have to be clarified, the fund providers speak of a novelty. “So far we have not been able to tell if and when foreign investors can sell shares or transfer money out of the country without any problems,” says Sebastian Kahlfeld. The manager of DWS Russia and DWS Eastern Europe does not want to rule out that the Kremlin will use the opening of the stock exchange to acquire companies cheaply.

If, on the other hand, political developments allow the western states to lift the sanctions and foreigners are allowed to trade fully again, the manager expects the price to rise. “Then things can go up quickly and strongly,” says Kahlfeld. “Russian companies are not worthless.”

So far, however, there have been no signs of a political change of course in Moscow. Joe Biden’s forecast for Russia’s economic future is therefore bleak. “The economy will collapse under the force of the sanctions imposed by the industrialized countries.”

A scenario that is not improbable: The Austrian Raiffeisenbank expects a severe recession for the current year. The decline in growth can be eight percent. In December, experts still expected the Russian economy to grow by 2.5 percent. If, as announced, the western states significantly reduce energy supplies from Russia or stop them altogether, there is a risk of an even more dramatic economic crash.

Citizens are already suffering. Within just one month, the prices for automobiles from foreign manufacturers have risen by 17 percent and for televisions by 20 percent. The prices for domestic products are also increasing. Meanwhile, the ruble is getting weaker. At the beginning of January, only 84 rubles had to be paid for one euro, it is currently 107 rubles. Russia’s central bank is trying to strengthen the currency by raising interest rates, but doing so risks exacerbating the recession. However, the Kremlin’s demand that the West must pay for future energy supplies in Russian currency should prove positive for the rouble.

Rising Incomes

In the Eastern European countries, too, the prices, particularly for oil and gas, are skyrocketing and, like in many other countries, the stock exchanges in Prague, Budapest and the Czech Republic have also come under pressure. However, risk-averse investors with a long investment horizon can build up initial positions.

Speaking in favor of getting started: the Czech Republic, Hungary and Poland are members of the EU. Since they were admitted to the international community from Brussels, they have received considerable financial aid and modernized their economies. In contrast to Russia, they have a broader economic base. In addition, the Eastern European countries are relatively moderately indebted. This makes them resilient to crises, the corona pandemic did not leave any deep damage.

After a minus of five percent in 2020, Hungary’s gross domestic product increased by seven percent last year. The economies of the Czech Republic and Poland also recovered quickly. Eastern Europe’s upswing goes down well with the citizens. In 2022, the annual per capita income in Poland will increase to 15,400 euros. According to the analysis company CEIC, in 2000 it was 5,300 euros. The economic strength is also reflected in the fact that Poland is Germany’s fifth largest trading partner. In addition, Poland is one of the countries that are driving digitization forward the fastest.

This makes the Warsaw Stock Exchange more attractive. In addition to established financial institutions such as Bank Pekao or the insurance group PZU SA, which are benefiting from the latest interest rate hikes, stocks such as the online marketplace Allegro are also on the list. 125,000 traders offer their products and services on allegro.pl. According to the company, the site is used by 20 million customers. That is around 80 percent of all Internet users in Poland. Allegro now wants to compete with Amazon in other countries as well.

The stock lost 48 percent over the course of a year, but in the past week alone it has risen by 12 percent. Investors are assuming that Allegro will once again be able to surpass last year’s sales growth of 34 percent in the current year. In order to relieve citizens of price pressure, the government in Warsaw recently drastically reduced VAT on petrol and gas. This frees up funds for consumer needs. The now more than two million refugees from the Ukraine are also responsible for increased demand and a high number of clicks on Allegro.

No supply bottlenecks

Promising stocks can also be found on the Budapest Stock Exchange. Like the Polish central bank, the Hungarian central bank is trying to get inflation under control. Last Tuesday, it raised the key interest rate by 100 basis points to 4.40 percent. Analysts expect further increases of up to seven percent. Shares in OTP Bank, Hungary’s largest financial institution, rose 5 percent in response to the rate hike. MOL Group shares are also currently in demand. Hungary’s largest oil and gas group and operator of an extensive network of filling stations is currently being sought. The management recently assured that it can continue to maintain Hungary’s fuel supply regardless of developments in Russia and Ukraine.

CEZ AS, on the other hand, is one of the long-term favorites on the Prague stock exchange. The utility, which is majority state-owned, supplies customers in the Czech Republic and other Eastern European countries with electricity, natural gas and heat. CEZ generates a growing part of its energy from hydroelectric power, wind power and photovoltaic systems. The Czech Republic intends to phase out coal by 2033. This currently contributes 50 percent to electricity generation.

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