July 2020 Newsletter: "Q2 Results and Valuation"

Updated: Nov 2, 2020

Another month passed by and another Baltic stock market made yet another step towards getting out from year-to-date underperformance trap- thanks to 2.29% gain in July, the Baltic stock market is down just 2.35% this year. Meanwhile, the flagship stock market index in the USA already breached into positive territory, returning 2.38%, but developed Europe remains weak with a 12.58% loss. In July S&P 500 appeared to have had the best performance among three indices, gaining 5.64% in a month, while European STOXX 600 lost 0.92%.


Figure 1. Close to break-even: Performance of Baltic, USA and European indices since the beginning of the year till 31 July 2020

Source: Alphinox, Thomson Reuters


The performance of the Baltic stock market flagship index, OMX Baltic Benchmark GI, is heavily influenced by heavyweights Tallink, Tallinna Sadam, LHV Group, Šiauliu Bank. To exclude the effect of Tallink, which has suffered recently and will most probably stay under pressure due to disruptions in the tourism and transport industries, we calculated equally weighted performance of the Baltic Index, assigning each company the same weight to see if the underperformance still holds for the general market.


Figure 2. Baltic stock market year-to-date performance: OMX Baltic Benchmark GI index market cap based vs equal-weighted

Source: Alphinox, Thomson Reuters


The comparison shows that the equally-weighted Baltic stock market strategy performed better, returning 1.52%, while the market-cap-weighted strategy lost 2.35% since the beginning of the year. Equally, the weighted strategy has worked better in July as companies with relatively small market capitalization, such as Nordecon (+12.37%), Pieno Zvaigzdes (+5.21%) delivered strong share price accretion, while Tallink drag was canceled out by lowering its weight.


Increasing stock prices have lifted the valuation of the markets.


As governments and central banks globally are doing ‘’whatever it takes’’ to support national economies, a substantial amount of liquidity lands in the financial markets. Investors are hunting for higher returns and often end up being invested in riskier asset classes, such as equities. This, in turn, lifts valuations that yet again are close to or have already reached historical highs.


Figure 3. Price/Earnings ratio for Baltic, USA and World end of year

Source: Alphinox, Thomson Reuters


The best example of ‘’stocks only go up!’’ mindset can be seen in the USA market, whose 12 months trailing P/E ratio stands ~28x. It has increased by 13% since the beginning of the year despite a slump in GDP, havoc in transportation and tourism, as well as the tight financial situation at many banks as investors, not only put hopes on fast recovery of these sectors but also are switching to tech sector with very robust revenue growth.

Global P/E acceleration is not so rapid, but it is also remarkably high at 23x, which is 6% more than in Jan 2020. The Baltic market lags behind on the valuation side and looks much cheaper than the global counterparts. So far, it trades at ~10.5x. Are Baltic stock market investors more risk-averse, or can it be that Baltic investors do not see many exciting companies chasing growth? The answer, probably, lies somewhere in middle.


Baltic Main List performance

July was a mixed month for Baltic Main List stocks. It was full of Q2 results announcements, but investors were not really eager to keep themselves busy with trading and stayed rather passive, which in turn suppressed turnover to EUR 28.14mn (EUR 35mn in June). It must be pointed out that last month a large part of the turnover was generated by Novaturas (EUR 5.9mn), as major shareholder sold its stake.


Figure 4. Performance of Baltic Stock market companies & world indices as of 31.07.2020

Source: Alphinox, Thomson Reuters


Most of the top performers in July were found in Lithuania, where a double-digit return was delivered by Telia Lietuva (10.64%), driven by good results. Telia was followed by Šiauliu Bank with 9.8% and AUGA Group with 9.05% performance respectively. Overall, the best performer was from Estonia – Nordecon with 12.37% gain.

As to laggards, some of them were our ‘’usual suspects’’ such as Novaturas and Tallink that sank 7.76% and 6.22% respectively, as uncertainties about traveling are rising in Europe as a situation around COVID-19 is worsening. Another COVID-19 victim –Apranga- shareholders of which lost 6.36%, pressured throughout the whole month by sellers in an anticipation of poor financial results. Tallinna Sadam was another loser, down by 7.05%, as the stock went ex-dividend on July 10th. If the dividend is added back to the share price, then Tallinna Sadam stock lost a mere 1.32%.


Reporting season continues in August and no doubt it will maintain its influence over trading mood. Besides, it will be interesting to see if raising the number of COVID-19 cases could again cause mounting fears among market participants.


About Alphinox

Alphinox is part of an independent asset management group with expertise in capital management operating in accordance with the Quality investment style. By combining investment expertise and long-term experience in analyzing global financial markets, Alphinox develops customized investment solutions and provides analytical research.


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