IC Market Espresso 16 Sep 2019

Looking for Security or Riding the Wave ?

Since economic cycles represent an important factor when bringing investment decisions, many investors have to weigh between stocks that are higher or lesser exposed to cyclic movement. Thus, we decided to check how share prices performed in 2019 depending on the sector they are in (Cyclical or non-cyclical).

Since economic cycles represent an important factor when bringing investment decisions, many investors have to weigh between stocks that are higher or lesser exposed to cyclic movement. A Cyclical stock is a stock highly correlated to the economic activity. When the economy is in a recession the profits of a Cyclical company tend to drop and so its share price. A Defensive (or non-Cyclical) stock is a stock whose profit growth and therefore its price has a very low correlation to the economic activity. No matter how the economy is doing, the revenues, the earnings and the cash flows of the company remain relatively stable and so does the share price. When breaking this down into sectors one could characterise consumer Discretionary, financials, industrials, information technology and materials as cyclic sectors, while consumer staples, energy, healthcare, telecommunication services and utilities are considered as more defensive sectors.

As we are currently in a time when investors are constantly expecting an upcoming slowdown in the world economy, we decided to see just how much those expectations influenced stock prices of cyclical and defensive stocks.

On the chart below we can explore the value development of the Dow Jones Market Neutral Momentum Index and the Market Neutral Low Beta Index. While the Dow Jones Market Neutral Momentum Index measures the performance of long/short strategies betting on high momentum, the Dow Jones Anti-Beta Index bets on low beta. As one can notice, lower beta stocks have been a more popular choice in the aftermath of the global financial crisis which comes as no surprise. Meanwhile, as the global economy was recovering, the difference between the two index’s performance started to shrink with shares that hold more momentum eventually overtaking the more defensive ones during 2017 in the midst of the ongoing bull market. When looking at the current YTD performance the Dow Jones Anti-Beta Index is up by 3%, while the Market Neutral Momentum Index is down 2%, which might argue that some preference towards the defensive sector does exist.  

Index Performance of Cyclic & Defensive Indices

Source: Bloomberg, InterCapital Research

Turning our attention to the region, CROBEX components tell a mixed story. While one should exclude the one off growth of Optima Telekom caused by the speculations regarding the company’s sale, the best performing companies have been Atlantska Plovidba (+36%), Končar (+18%), Adris Group (+12%), Ericsson NT (+11%) and Podravka (+8%) who all managed to beat the major index CROBEX (+8%). Although defensive stock account for the majority of these top performers, one can notice that investors still haven’t’ ruled out some cyclical sectors.

YTD Performance of CROBEX Components

Source: Bloomberg, InterCapital Research

Slovenia tells a slightly different story. While KD Group’s share price was influenced by the recent sale of their insurance business, other companies that are in the green thus far are evenly split among cyclical and defensive sector. 

YTD Performance of SBITOP Components

Source: Bloomberg, InterCapital Research

Romania on the other hand might give a slightly misleading look at first as most index components recorded double digit growth on a YTD basis. However, one should note that this is mostly a recovery from the sharp drop recorded at the end of 2018, caused by the implementation of new tax regulations levied upon the banking and energy sector.

YTD Performance of BET Components

Source: Bloomberg, InterCapital Research

NLB Submits Takeover Bid for Komercijalna Bank

According to the writings of the Serbian media, NLB has submitted their offer to purchase the Serbian Komecijalna Bank. However, at the moment there has been no information regarding the offer price.

Note, however that this was not the only offer submitted as the total number of offers amounted to four. Other interested buyers were: AIK Bank, Raiffeisen and Direktna banka.

As a reminder, the Republic of Serbia has earlier this month reached an agreement with EBRD and IFC Capitalization Fund concerning the sale of 34.58% of the ordinary shares in Komercijalna Banka. Following completion of the mentioned transaction, the Republic of Serbia will own 83.2% of the ordinary shares of the Bank.

To read about Komercijalna Bank’s H1 2019 performance please click here.

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