Thursday, 27.11.

2008

Irrational exaggeration
In times of growth as well as in times of market decline, there is a phase when masses and their psychology step
out of the line and start a phase of irrational exaggeration.
exaggeration In such environment, positions are made of extreme
returns that are usually achievable long term. Our last newsletter already discussed the trend of valorisation of the
Croatian capital market and concluded it had never been historically cheaper. The relation between price and
earnings of the CROBEX index currently lies at unseen levels until now and totals 5.5. This is within the range, in
which all secular growth trends have started on the developed financial markets. It is off course impossible to
determine the very bottom at which a reversal will happen, but it is possible to draw the conclusion that the market
has certainly entered a phase of acute undervaluation, which represents the end of a falling secular trend that
lasted over the past 10 years.

Deflated, the CROBEX index lies below its level in the years 1996/97. Since then, the trend of the index value was
consolidating, except for the period between 2006 and 2007.
2007 Given that secular trends represent long term growth
periods, the Croatian capital market has obviously never been in such a trend.
Chart: Deflated CROBEX Index
6000

5000

4000

3000

2000

1000

0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Deflated CROBEX Index
Source: Agram Brokeri

In 2008, Western European markets dropped by 42% in average, central European ones by 56%, while Croatian fell
by a much higher 68% during the same period. On that account, the Croatian financial market has gone, in
comparison with European ones, through the highest correction, even though the fundamental background did not
justify it.
Chart:: Price decrease in terms of stock exchange index in 2008
0,00%
Njemačka

Czech.Rep
France

Austria

Slovenia

Croatia
Spain

Poland
United Kingdom

Hungary
Italy

Western Europe

Central Europe

-10,00%

-20,00%

-30,00%

-40,00%

-50,00%

-60,00%

-70,00%

-80,00%
Source : Bloomberg
Such a fall generates an obvious comparative undervaluation, with P/E relation among the lowest and dividend
return among the highest in central Europe.

Chart: P/E relation central European markets

12

10

0
Austria Poland Czech.Rep Hungary Slovenia Central Europe Croatia

Source : Bloomberg

Chart: Dividend returns central European markets

8,00%

7,00%

6,00%

5,00%

4,00%

3,00%

2,00%

1,00%

0,00%
Austria Poland Czech.Rep Hungary Slovenia Central Croatia
Europe
Source : Bloomberg

The crash that recently happened in Hungary and Poland, their lack of foreign currency reserves stabilising the
domestic currency, and their solicitation of IMF help, all of this, points out that the decline of the Croatian market
and its comparative undervaluation are the result of an irrational exaggeration. All the more since we have a stable
currency with sufficient foreign currency reserves to fully cover all the cash in circulation.

Therefore, positions in low indebted companies with high growth rates and full order books for the next two years
constitute an excellent investment opportunity, given that the crisis will not significantly affect their financial
results. The masses are currently depressed, and when such is the case, it usually offers financial assets at
discounted prices that guarantee significant long term returns.
returns
 Chart: Opinion poll on Croatian citizen sentiment
80%

70%

60%

50%

40%

30%

20%

10%

0%
Optimistični Neutralni Pesimistični
Optimistic Neutral Pessimistic
12.4.2008 20.11.2008
Source : www.net.hr

Opinion polls on Croatian citizen sentiment of the Croatian economy reveal that the number of optimistic has been
halved in the last 6 months, while pessimistic almost doubled.
doubled Were the masses reasonable when, mid April at the
beginning of the financial turbulences, it believed it would not hit Croatia? Are the very same masses right today?
Disclaimer

This publication is prepared by the Department of Analysis of Agram Brokeri d.d, a company dealing with securities,
which in line with legal regulation, is authorised to trade with securities on the territory of the Republic of Croatia.

This material: (i) is for your personal use and Agram Brokeri d.d. does not advise any activities based exclusively on
it; (ii) does not constitute any incitation to buy / sell ; (iii) even though we believe in its relevancy, we not guarantee
its exactness or completeness and, as a consequence, it should not be taken as such.

Considering the date of the publication mentioned on this material, the opinion expressed is a current overview of
the market, and as such, data and opinions may be subject of changes without prior notice. Furthermore, Agram
Brokeri d.d., the members of its board and all the employees of the company, including the people who participated
in the preparation of this material, are allowed according to the Law, to buy and sell securities issued by companies
mentioned in this publication as well as their financial instruments.
instruments Agram Brokeri may also perform special stock
trading (market making), presenting at the same time offers to buy and sell securities of companies mentioned in
this publication. When taking their investment decision, investors should take this report as one of many factors that
does not identify all direct and indirect risks affecting them.
them

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d.d can provide, please visit the official site www.agram
agram-brokeri.hr or contact us by e-mail at info@agram-
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