With SBITOP outperforming quite significantly almost every global equity index on a YTD basis, you might be asking yourself a question – is there still room for growth of Slovenian equities in 2021?

If you have been holding the Slovenian equity index since the beginning of this year, you have done your portfolio a favour. To put things into a perspective, SBITOP noted a YTD increase of close to 20%, thus outperforming virtually every global equity index so far in 2021.

However, if you are not yet invested in Slovenian equities or are thinking of holding you might be asking yourself a simple question – is there still room for growth for Slovenian equities in 2021?

In today’s blog, we will try to answer why Slovenia outperformed basically all major equity indices such as S&P500, DAX, Dow Jones, Nasdaq, FTSE100, CAC40, the list goes on. And more importantly, we will try to answer why we believe that Slovenia still has more than enough room for growth.

As a reminder, in late 2020, we wrote a short research piece called “7 things to expect from Slovenia in 2021” in which we already gave a positive view on the market for 2021. So far, virtually all of our expectations have realized.

YTD Performance of Selected Indices

Source: Bloomberg, InterCapital Research

The comeback of value

If we were to look at the US market and define value as a simply low P/E and P/B and growth as high P/E and P/B, one can notice that for the past 6 decades (by decade) value stocks have almost always outperformed growth stocks with the exception of 1990s (dot com boom). However, in 2010s we observed a reversal in the US, where growth outperformed value stocks (with an emphasis on FAANG stocks). 2010s were a decade of low to no inflation, which arguably backed the outperformance of growth, while value and commodities were left out of sight of many asset managers.

If we were to look at how value and growth performed during the outbreak of Covid-19 until late 2020, we reach an interesting conclusion. What is considered as traditionally less risky (low P/E, low P/B, high dividend yield, low growth) has significantly underperformed since the outbreak of the pandemic. In that sense, this crisis is not like the previous ones. However, in late 2020 positive vaccine news and the expectations of economic normalization brought a return to cyclicals and value stocks, which have been lagging growth stocks for the majority of the rebound.

This was arguably seen as a positive sign for the Slovenian equity market as we can consider virtually all Slovenian blue chips as value stocks. Therefore, the performance of +20% YTD of SBITOP does not seem so surprising. We believe that value is here to stay or even be more pronounced for some time, as inflation remains the buzzword of financial markets. The question that remains is will most asset managers make considerable changes to their allocation to convey an increased chance of a persistent inflation? Many analysts seem to agree that this will be the case, which would imply a continuation of solid performance of value and cyclicals. As a result of the aforementioned, many analysts are expecting that emerging markets and Europe should outperform S&P500 in the coming period.   

Slovenia remains fundamentally attractive, while FY 2021 results should be encouraging

Despite begin one of the best performers so far in 2021, Slovenia still looks very much fundamentally attractive. According to Bloomberg, the index is currently traded at a P/E of 8.8x, which is by far one of the lowest multiples in the region. Such a multiple represents a significant discount to developed market (DAX is traded at a 3.7x higher P/E).

We note that 2021 will almost certainly show a rebound in operating results for the vast majority of Slovenian companies. This can be further supported by plans published by companies, in which most estimate solid 2021 results. We have already published updated company analyses of Slovenian blue chips which are available for our Research subscribers. In case you wish to receive these, feel free to contact us. 

It is also important to note that the current Covid-19 situation in Slovenia seems to be reassuring, as the country has been seeing a significant decrease in daily cases and is gradually loosening restrictions. The vaccination is taking a slower pace than the EU average according to Our World in Data, however roughly one forth of Slovenians have received at least one dose of Covid-19 vaccine. We believe that Slovenian blue chips should show resilience, even in a slow rollout of the vaccine.

Additionally, the index is on a way to deliver another attractive dividend yield which could reach c. 5.5% (compared to 4.1% in 2020). With the stabilization of macroeconomic situation, we deem that the DY might be even higher in the coming periods (closer to 2019 levels of 6.4%).   

P/E of Selected Indices

Source: Bloomberg, InterCapital Research

Conclusion

So far in 2021, Slovenian equity has shown a stellar performance, however we believe that the market still has more than enough room for growth. This could be further backed by the fact that the market remains fundamentally very attractive, being traded at one of the lowest multiples in the region and at a significant discount to developed markets. Additionally, Slovenia might further benefit from a continuation of solid performance of value and cyclicals for the reasons described above. Moreover, the already shown resilience to the pandemic by Slovenian blue chips, a (somewhat slow) rollout of the vaccine coupled with positive expectations for 2021 are enough for us to remain positive on Slovenia.