CEEMEA Road Ahead 2015
Volatility to Continue But Flat Returns as a Region
* Macro — The region is likely to experience another year of sub-trend growth in
2015, with weak commodity prices & current account deficits featuring as common
challenges. Sanctions & uncertainty have prompted us to forecast a 1% contraction
in Russia, marking the sixth year of worsening GDP. In contrast, Poland’s growth of
+3.5% in 2015 is driven by robust domestic demand and a healthy labour market.
* Earnings — Consensus expects earnings growth of 10% in 2015, slightly weaker
than Latam and EM Asia, but still above DMs. At +15%, EPS growth in Turkey is
amongst the strongest, thanks to lower oil prices and moderating inflation. We
expect earnings downgrades in South Africa and Russia.
* Valuation & Market Target — Premium valuations in South Africa and Poland
contrast against the extreme discount of Russia. We see the best returns over the
next year coming from Turkey, our year-end target implies 15% upside. South Africa
sits as our key underweight, where we expect the local index to fall by 5%. As a
region, our CEEMEA year-end target implies flat prices, with this dropping to -5%
once we account for the US$ recovery that our economists forecast.
* Themes — The first US rate hike, combined with a US$ recovery, can be expected
to put pressure on South African and Turkish assets. South Africa also sits in a
vulnerable position given the slide in commodity prices (similarly with oil in Russia).
Given these challenges, we expect investors to maintain a preference for strong
yield & capital return stories. We also expect ‘quality’ to keep outperforming.