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News

High valuation suggests profit taking and reducing equity positions

11.12.2017
Company: Komerční banka, a.s.

The main global stock markets were marked by reaching new highs in the fourth quarter. Positive global macroeconomic development continued, and the earnings season exceeded expectations.

At the end of the year, the Prague Stock Exchange stagnated after its previous growth in the third quarter. Despite only 2% growth, it managed to outperform most of its Western and CEE peers.

After a short break, CME and Fortuna once again became the frontrunners on the Prague Stock Exchange. ČEZ, which gained 11% in the fourth quarter and ranked third, was also very successful.

The post-summer holidays period led to an increase in trading volumes on the Prague Stock Exchange. ČEZ kept its lead with a 35% share on 4Q traded volumes. Smaller issuances have moderated their increased activity in the past quarter as the share on traded volume of the five largest stocks increased from 85% to 88%.

SG continues to reduce the risk profile of its allocation. Asset price valuations are indeed high or very high, but for EM assets, risk-taking and momentum-investment are at their peak. Société Générale reduced the exposure for equities in its asset allocation and advises keeping an underweight position. High growth expectations are an incentive to continue switching out of equities in favour of sovereign bonds. With an impressive run since June and net positioning at an all-time high, SG suggests slightly reducing oil and other commodities.

The U.S. S&P 500 has entered expensive territory. Indeed, on all metrics, U.S. equities are trading at levels only seen during the late-90s bubble. Since Trump’s election, the U.S. equity market has risen more than 25%, but only half of this comes from earnings growth. The other half has been driven by P/E expansion, as the U.S. market is already pricing in potential tax reform.

Positive economic momentum should continue to support the EuroSTOXX 50 and core markets such as France and Germany. However, the stronger EUR and higher bond yields will likely limit performance. Both the Italian and Spanish equity markets will probably be more affected by changes in ECB policy as their overall credit ratings are relatively weak.

The Prague Stock Exchange could deliver a growth of around 9% next year with an estimated dividend yield at 5.4%. We believe financial stocks are among the most attractive on the PSE, especially Moneta Money Bank and Erste Group. We also recommend buying shares of CME, Philip Morris CR and Fortuna. Pegas Nonwovens and Fortuna will be likely delisted from the PSE. 

Tags: Economics | Finance |

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