IC Market Espresso 9 Oct 2023

9M 2023 Croatian Equity Market Overview

With the end of September, the Q3 of 2023 has come to an end. In this blog, we decided to bring you a brief overview of how the Croatian equity market performed during the first three quarters.

2023 so far was marked by a positive movement in global capital markets overall. The positive sentiment arose from better-than-expected macroeconomic development. In other words, all the expectations and waiting for a real recession (not only a technical one!) did not materialize. Therefore, before we dive deeper into regional equity development and companies specific we would like to emphasize a thing about investing. This year’s development is a prime example of the well-known expression “always be in the market”, or any other deviation of this sentence like “more money has been lost timing the market, rather than being in it” or any other. If an investor were to wait for the “worst case scenario”, currently he would miss strong double-digit YTD returns, occurring both in global & regional equity markets.

YTD performance of selected indices

Source: InterCapital Research, Bloomberg

With that said, let’s dive deeper into regional capital markets development. The aforementioned positive market developments on global equities spilled over directly to the regional capital markets resulting in strong double-digit returns on ZSE. Next to NASDAQ, CROBEX 10 even outperformed most of the selected indices, both regional and global ones. This occurred as regional indices, historically, do not have a strong correlation to global indices – resulting in a slight divergence in returns. This year in CROBEX10’s favor.  Overall, it’s enough to say that from all CROBEX10 constituents (and the index itself), only three constituents did NOT report a double-digit YTD return, while Ericsson NT is the only constituent to note a share price decrease since the beginning of this year.

YTD Performance of CROBEX10 constituents

Source: InterCapital Research, Bloomberg

As can be seen from the graph above, clear winners for this year’s performance so far, are HPB, Podravka, Končar and Span. HPB’s share price increased by as much as 75.3% with Podravka following closely with 73.5%. Končar and Span are to follow with 59.4% and 40% return, respectively. The mentioned returns came on the back of solid results during H1, overall. If were to look at Končar’s numbers at the normalized level (due to strong one-offs in H1 2022), the normalized EBITDA margin increase by 1.9 p.p. due to strong top-line growth & stabilization on the cost side. Normalized EBIT increased almost 2x YoY. Podravka managed to sustain its bottom line on more or less the same levels as the previous year. The group’s profitability suffered in the Food & beverage segment, but the profitability drag was offset by the Pharma segment. However, the reported net profit was amplified by the tax incentives of EUR 19.7m due to Investment Promotion Act, resulting in strong bottom-line growth. Finally, Span grew on the back of strong investment cycle that happened in 2022, when the Group employed more than 200 people. However, it should be noted that Span noted a strong share price pressure during Q3, which partially offset an even more pronounced share price increase in H1. This happened as the market expected to see Span’s results already being driven by the mentioned investment cycle during the second quarter, which was not the case. Therefore, Span’s development during the upcoming quarter and the end of the full year will be an interesting development to observe.

5 most liquid stocks on ZSE during the first nine months [EURm, block trades included]

Source: InterCapital Research, ZSE

Now what does the liquidity tell us? A complementary story to what returns on ZSE already told us. We can clearly see that Podravka and Span were captivating investor’s attention on the stock exchange. Further, if we are to look only at equity turnover (blocks included), during the first nine months of trading on ZSE, the 5 most traded companies accounted for as much as 49.3% of total turnover. Generally, a 5 most traded stocks do not account for almost half of the trading done on ZSE. Usually, the equity turnover is slightly more diluted. Given percentages only amplify the attention that Podravka and Span received. Further, we would like to point out that during H1, Span was the most traded stock on ZSE, which is quite an achievement given the fact that the company was listed in November 2021. However, Podravka took most of the attention during the last quarter.

Fitch Affirms Croatia at ‘BBB+’, Outlook Revised to Positive

On Friday, Fitch Ratings released an updated review of its credit rating for Croatia. In the report, they affirmed Croatia’s status at ‘BBB+’, while improving Croatia’s outlook from Stable to Positive. In this brief summary, we’ll go through the main points of the report.

Fitch Ratings has affirmed Croatia’s Long-Term Issuer Default Rating (IDR) at ‘BBB+’, while improving outlook from Stable to Positive. The key factors influencing their report are the following: an approach to fiscal policy and public finance & monetary and exchange rate policy management remains consistent with that currently disclosed to Fitch. Besides that, Fitch also assumes that the condition of the financial sector of the sovereign issuer is consistent with that currently disclosed to the agency. Further, another assumption made by the agency in this report is the relevant key operating environments (e.g. legal, economic, political, regulatory) will remain consistent with expectations based on historical trends.

Besides providing us with the assumptions made to derive to Croatia’s ratings and outlook, the agency also provided us with factors that could lead to an upgrade or a downgrade.

Starting off with the potential downgrade – it might come due to the lower growth from the structural shocks affecting key sectors, weaker demographics or inflation remaining entrenched at high levels, which could lead to erosion of external competitiveness. Further, a possible downgrade might come from the risk of a sustained increase in general government debt over the medium term, for example, due to a pronounced and long period of fiscal loosening.

Moving on to the potential upgrade – it might come due to the long-lasting inflation decline, sustained GDP growth and confidence in the government’s ability to keep public debt on a downward trajectory through fiscal consolidation. Also, the implementation of structural reforms or positive spillovers from euro adoption, which supports the convergence of GDP per capita, might support the diversification of the economy and enhance productivity.

The entire report can be accessed here.

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