Vienna Stock Exchange is cheap –
it’s as simple as that

On the one hand, history shows that a stock market that on average trades at price-earnings multiples of 10, comes with a 10 % discount to book value, and distributes dividends yielding far more than government bonds, can only be said to be cheap. Therefore, stocks listed in Vienna undoubtedly are attractive, supported by comparisons to historic multiples observed in Vienna as well as valuations of international peers. But on the other hand, experience tells that just due to cheap valuation, stocks prices don’t necessarily have to rise. It also takes confidence and liquidity for markets to prosper, neither of which can be found in Vienna at the moment. Will that change? And if so, when will that happen? It will, but we can't tell at what point that will happen. It hugely depends on the return of international investors to Vienna; domestic investment demand alone will not be enough to achieve rising stock prices on a sustaining basis. Unfortunately, all political parties in Austria seem to lack the understanding of the importance of financial markets for securing international competitive advantages for domestic businesses. We even saw a number of developments that don’t stand up to what was expected from one of the leading industrialized nations.

Still, attractive valuations historically spurred investment demand. This time will not proof to be different. As soon as investor confidence returns to the major stock markets, it will start to spill over to Austria as well. Currently, the news flow is too much focused on Greece and Spain. Developments concerning the quality of listed companies are still widely ignored. The best advice for investors in such an environment is to be invested and to be patient. Waiting until the debt crisis is resolved will not work out, as it may take years for that to happen. What’s more, prices tend to anticipate solutions on such a level. As fixed-income investments per se should be questioned at the moment, due to either insufficient yield or inappropriate risks, company ownership definitely makes sense. My advice is to differentiate strategic investments from tactical portfolio allocations.

Strategic investments will be those that are intended to be held for years. Examples of such investments are companies that benefit from megatrends, firms that are well-positioned in the current macroeconomic environment, or businesses that simply do not depend as much on the business cycle as the stock market itself. Once invested, such positions should not be questioned on a daily basis, even if stock markets are volatile. Examples for such strategic investments are Kapsch TrafficCom, Lenzing, or Andritz. These companies are internationally positioned in promising industries, led by successful Austrian managers.

Tactical investments are companies that are bought because the current price shows considerable dispersion to the assumed value. These positions don't necessarily have to be held for years. In Vienna, one example of such a company is Immofinanz, with the specific case of the stock market failing to price the progress of management towards increased profitability appropriately. Another example is Raiffeisen International, where many investors price the risk stemming from Eastern Europe too aggressively. If one adds Austrian Post (which currently yields 7 %) to the afore mentioned stocks, the foundation for a solid portfolio should be laid, given sound strategic and tactical considerations. I recommend to be patient and not to be irritated by the ongoing news-flow considering the European periphery.

Author:
Alois Wögerbauer, CIIA
Executive of 3 Banken-Generali Investment-Gesellschaft m.b.H. 
July 2012