As the year many of us would rather forget is approaching an end, the world is turning to 2021 with hopes of life coming back to normality. For one of our last blogs of the year we are bringing you what to look for in 2021 on the Slovenian equity market.
As the year many of us would rather forget is approaching an end, the world is turning to 2021 with hopes of life coming back to normality. The positive news on vaccine development in November gave the markets enough reasons for the optimism, which resulted in the highest monthly increases in 2020 in Croatia and Slovenia.
However, if someone went back in time and met you on the 1st of January 2020 and prepared you for the fact that there will be a pandemic which will lead to a global shutdown, chances are you might have not guessed at the time that SBITOP (total return) would approach the year end flat. In other words, if you were holding Slovenian equity index in the beginning of 2020, your portfolio approached year end basically “intact”. Thus, the obvious question that lies ahead is what we can expect from Slovenian equity market in 2021.
1) Macro wise – the worst seems to be behind, while recovery seems ahead
It is reasonable to expect a recovery of personal consumption in 2021, but we still do not expect to it to reach 2019 levels. The recovery will be supported by improved sentiment, giant fiscal push from the government and new EU programme 2021-2027 that will most likely be increased by ‘New Generation’ package of EUR 750bn. We recognize that some services were hit permanently, and these losses will not be recoverable and there will be some industries that could change forever. However, there will also be some new ones that would come with digital and green revolution. On top of New Generation recovery fund, according to the Slovenian Finance Minister, Slovenia could also get around EUR 1.1bn worth of funds from SURE (Support to mitigate Unemployment Risks in an Emergency), which translates to roughly 2.5% of GDP. We note that some of these funds were already available for Slovenia before the year end. Slovenian government also implemented five measures which should according to the Ministry of Finance increase the government debt in relation to GDP by 16.3%. Such an increase is slightly below the expected increase of 16.7% on the Eurozone level.
Besides that, ECB recently announced an increase of PEPP envelope by 500bn to a total of EUR 1,850bn. It also extended the horizon for net purchases under the PEPP to at least the end of March 2022. In any case, the Governing Council will conduct net purchases until it judges that the coronavirus crisis phase is over. Just to put things in perspective, PEPP data as at end November showed that Slovenian share was EUR 3.13bn, reflecting Slovenian capital key.
2) Equity remains popular, while Slovenia might benefit from a recent shift to value
With more than a quarter of global bonds (or c. USD16.5trn) having negative yields again, the search for yield has pushed investors to equities and it seems that the trend is here to stay for some time. The total return potential for fixed income investors appears to be increasingly limited as the proportion of negative-yielding corporate bonds (mostly investment grade) is close to 10%.
Besides that, we believe that further positive vaccine news and economic normalization could bring a solid return on cyclicals and value stocks, which have been lagging growth stocks for the majority of the rebound. More specifically, the scale of underperformance of global value stocks was unprecedented during the recovery. However, a turn towards value has already been pronounced in November and seems to be the trend for 2021. This could be seen as a positive sign for the Slovenian equity market as we can consider virtually all Slovenian blue chips as value stocks.
3) Slovenia is still fundamentally attractive
Despite begin one of the best regional (or least bad) performers in 2020, Slovenia still looks very much fundamentally attractive. Currently the index is traded at a P/E of 8.1x, which is by far one of the lowest multiples in the region. Moreover, SBITOP’s 2021 P/E represents a significant discount to developed market (39% discount compared to DAX 2021 P/E).
Meanwhile, looking at the historical development of SBITOP’s multiples, one can notice that the index is, according to Bloomberg, currently traded at one of the lowest multiples (EV/EBITDA of 4.97x), quite lower than the 10-year median EV/EBITDA of 5.98x.
4) Covid-19 related risks to remain in spotlight
Short term wise, the main risk for global markets remains the rising number of Covid-19 cases, which has led to a second wave of lockdowns and increased restrictions throughout Europe. As a reminder, Slovenia imposed a relatively strict lockdown already in October, while for the first time since WW2, a restriction on movement at night was introduced, meaning that Slovenians are not allowed to leave their homes from 9 pm until 6 am. The recent November recovery has been strongly tied to the probability of the availability of a vaccine by Q1 2021, which rose with positive Phase 3 data from Pfizer/BioNT and Moderna.
As Covid-19 vaccines start to receive emergency approvals, the race is on to distribute the product that billions of people across the world will want. The speed at which the vaccine will be efficiently and safely distributed will be the focal point of the recovery and the potential end of the pandemic.
5) Companies should show better performance in 2021
There is no doubt that the pandemic brought many challenges to Slovenian companies, as in the first 9m of 2020, only two Slovenian blue chips recorded an increase in net profit, that being Krka and Sava Re. It seems that the same will be the case regarding FY 2020 results. However, 2021 will almost certainly show a rebound in operating results for the vast majority of companies. This can be further supported by plans published by companies so far, in which most estimate solid 2021 results. We expect that all heavy weights will show solid performance in the next year, that meaning bottom line increases. We have already published updated company analyses for these companies which are available for our Research subscribers. In case you wish to receive these, feel free to contact us.
6) Slovenia should once again deliver a solid dividend
Almost all Slovenian blue chips could be characterized as mature companies which are continuously paying our dividends, while offering very attractive yields. To be specific, despite the pandemic and a year in which financial institutions did not pay out a dividend, SBITOP offered a dividend yield of as much as 4.1% (compared to 6.4% in 2019). One can expect that, with the stabilization of the macroeconomic situation, dividend yields would converge closer to 2019 levels, especially once financials start paying out dividends again (as they cumulatively account for c.30% of the index). Given the solid capitalization of Slovenian insurers and the fact that the insurers bore the pandemic very well, we deem that both Triglav and Sava Re will pay out a dividend, short of a regulatory restriction. Besides that, ECB lifted the dividend ban for banks last week, however with a payout cap below 15% of cumulated 2019 & 2020 earnings. For NLB Group, under the assumption of cost of risk ending the year at 150 bps, such a payment would infer a potential dividend of EUR 1.9 per share (DY 4.2%) according to our first estimates. However, the management has not yet given any direction as to whether they would pay out a dividend in 2021, given the new ECB decision and the acquisition of Komercijalna Banka.
7) Developed markets might receive less spotlight
It seems that there is a global consensus among analysts in short to medium term view in terms of performance of the developed markets vs emerging markets. To be specific, most are predicting an underperformance of developed markets (particularly US) compared to emerging markets. Such reasoning comes on the back of expected loosening of US restrictive trade policies, which is anticipated to in turn result in a depreciation of US dollar against global currencies. Thus, one might expect a return of US investors to emerging markets as the relative appreciation of EUR would result in FX gains, rather than recent losses. Furthermore, such estimates could be quite beneficial to European small caps, as they tend to benefit from EUR strength relative to larger cap stocks. In other words, small cap stocks could be characterized as more direct play on the Euro area. This could be particularly positive news for the Slovenian market, as virtually all Slovenian blue chips lie within this category.
Therefore, taking into consideration all of the above stated, we might potentially see an inflow of funds by new investors in the Slovenian equity market.