So far in 2022, the equity market started giving us slacking signs. The majority of regional quality blue chips, included in indices with respectable weighting, reported steady market movement.
There has already been plenty of recent discussions of yield flattening on the money market, as market participants „price in“ the not so good looking equity outlook via bonds. We have seen a negative spread between US 2Y and 10Y bonds, representing so-called „yield inverting“ – meaning money is flowing out of the equity into the bonds. A lot of market distortions are present on top of that – geopolitical situation and boiling inflation which just might not be „transitory“.
US 10-year and 2-year treasury spread
The indicator which has attention of almost every investor is US spread between 10 year and 2 year treasury bonds. The most know recession-wise indicator, one can notice that since 2021 spread kept decreasing, even reporting negative numbers at some point. Spread decreasing means investors are buying more 10-year bonds, thus driving it’s yields one can achieve down. Consequently, 2 year and 10 year bond could potentially yield the same. The aftermath of yield spread decreasing represents important change in money flow – investor’s money outflowing from equity into bonds, meaning investors “price in” their fear of recession and buying “safer” assets – bonds.
So, how did the regional equity perform in 2022, so far?
For general region equity outlook, we took reginal indices (CROBEX10, SBITOP, BET, SOFIX and BELEX15). Indices movement clearly indicate lack of movement in the regional equity market. Last week, indices closed at approximately same levels as they opened in 2021. There are few quality blue chips within CROBEX10 and SBITOP for instance, that reported robust growth in both sales and bottom line, yet movement on market did not follow-up those strong fundamentals. For a more detailed look, we separated CROBEX10 and SBITOP and each of their constituents.
CROBEX10, SBITOP and their constituents YTD performance (%)
For regional equity market representatives, we took CROBEX and SBITOP, as well as each of their constituents. Looking at the graph below, we might easily come up with a wrong conclusion. Graph shows a pretty volatile situation, but we should take a more precise look at the situation. Each one of the most volatile companies is not a real representation of the current market sentiment. Let’s break each one and further elaborate.
The worst-performing stocks were AD Plastik and Krka, with YTD amounting to -43.8% and -23.2%, respectively. Both of these companies were impacted by the Russian invasion of Ukraine. On a FY 2021 basis, AD Plastik generated 27% of its revenues from Russia, where at the moment, car producers ceased their production activities. On top of that, AD Plastik’s European market is further dragged down by the still-present semiconductor shortage – a perfect example of company-specific risk realization. Krka’s price share found itself affected by mentioned geopolitical situation too. Even though the company’s underlying business was not directly and materially impacted, as AD Plastik was, the market priced in the risk connected to Russia and Krka’s share price fell.
On the positive side of the spectrum, the best YTD performer was Atlantska Plovidba with a 41.4% YTD, which was actually a result of really strong Q1 results. The company recorded a strong EBITDA increase of 134.4%, with the bottom line increasing more than fivefold due to favorable market trends. Taking the results into account, for the sake of simplicity, we will not consider Atlantska an outlier, as yield was driven by the operating results and not “one-off” effects. Other than that, Cinkarna reported a strong YTD yield of 17.4%, which was purely driven by strong results driven by supporting the economic situation regarding the Titanium Dioxide segment.
Overall, we can see most of the YTD returns fall in the -10% to 10% domain. We had some quality blue chips with a relatively high weight in the index reporting strong results, like Končar or NLB, but the market moved their share price slightly. In the graph below we can see both median and average of YTD yields, to better present YTD results. With outliers excluded (Dalekovod, AD Plastik and Krka) we can notice that both YTD median and average do not change much, as outliers mostly offset themselves. One can notice even the average YTD not including outliers does not amount to more than 2%, clearly showing the regional equity market reported slacked movement, even though Q1 results were pretty solid with most constituents being in a “green” field, as sales have increased.