By Daniel Salter, Chief Strategist at UniCredit Securities.
If this is a “normal” mid-cycle market correction, markets could soon start to find a bottom, with the S&P 18% off since its cycle high (in line with the median of fourteen 10%+ downturns for the S&P since 1975). However, if recent events (including the heated debate over the US budget, subsequent downgrade of the US credit rating, continued stresses within the Eurozone plus recent financial markets volatility) are enough to drive the recent soft spot in global growth into a double dip, emerging market equities could have another 20% to fall (or 35% if 2008-2009 style seizure of the global financial sector were to take valuations back to the 2009 lows).
We perform a multi-factor quant-screen of MSCI Emerging Europe for what could work best in the event of further weakness, and what could perform well in a recovery. We believe that cheap, high yield, low price-to-book, low leverage and low beta stocks should be defensive if things worsen; high growth, high beta, higher leverage stocks that have recently underperformed could perform better in a recovery. We have limited the portfolio screen to UniCredit Buy or Hold rated stocks.
Our defensive quant screen highlights Tauron, Telefonica O2 CZ, Lukoil, Surgutneftegaz, TPSA, PGNiG, Magyar Telecom, CEZ, Cyfrowy Polsat and RusHydro amongst non-financials; Sabanci Holding, Is Bank , Bank Handlowy, Komercni Banka and PZU among financials. (In Turkey, we could add telecom, beverage and retail stocks, not all of which we have under coverage currently)
A recovery quant screen would include Turkish Airlines, Mechel, Sistema, Severstal, TVN, Raspadskaya, Federal Grid Company, TAV, Novatek and MTS amongst non-financials; GTC, OTP, Garanti, Getin and Bank Millennium amongst financials.
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