East European stocks coiled for catch-up, with Ukraine caveat
* East European stocks jumped 25 pct last time ECB did LTRO * Underperformance metrics have reached historic levels * East Europe performance gap link.reuters.com/bap82w * CEEU stocks LTRO reaction link.reuters.com/byq82w * East Europe P/Es vs EM link.reuters.com/zyn82w * EM 2014 FX performance link.reuters.com/jus35t By Marc Jones LONDON, Sept 16 (Reuters) - Eastern European stocks were the surprise winners from the ECB's last flood of ultra-cheap cash almost three years ago and could be again, albeit with investors keeping a wary eye on events in Ukraine. A stampede this year into China, India and the Middle East drove emerging market shares to overtake their advanced economy peers back in June, just as the deepening conflict in Ukraine rocked Eastern Europe's markets. That has pushed the performance gap between MSCI's main EM index and its Russia-dominated eastern European one to its widest on record. Even excluding Russia, regional stocks are down more than 2 percent this year, according to MSCI, and based on earnings estimates for next year, the region has never been cheaper overall versus broader emerging markets. So with Mario Draghi about to demonstrate his commitment to getting the euro zone - eastern Europe's biggest trade partner - back on track, some are wondering whether a rebound is due. Last time the ECB flooded markets with ultra-cheap cash back in late 2011-early 2012, eastern European stocks jumped just short of 25 percent in 85 days. The correlation was almost perfect and Draghi will start doing it again on Thursday. "For central and eastern Europe, Russia has clearly been the issue," said Henning Esskuchen, head of regional equity strategy for Erste bank, which operates widely in the bloc. "So if the ceasefire (in Ukraine) holds, and (Russia and the European Union) are not bashing each other with further sanctions, then we should have a good chance of closing that performance gap." European leaders did introduce further sanctions on Friday , but these had been anticipated. Shares in Poland, the Czech Republic, Hungary and Romania have dipped along with most global markets in recent days but are all up over the last month. That contrasts with a near 2 percent fall in MSCI's benchmark EM index. A sell-off in the region's currencies has also eased with the exception of the rouble. A bond market rally, spurred by anxiety about Russia, has petered out. . ECB BENEFIT Meanwhile some of the year's high-flying Asian markets and others like Brazil, Turkey and South Africa have all had their wings clipped by the Federal Reserve as it rolls towards rate hikes. Details on that are expected this week. Eastern Europe fared better than emerging markets overall during the original round of Fed turbulence because it is more closely aligned with the ECB due to its ties to the euro zone. Even so, economic growth is slow, banking problems dog many countries and in Ukraine, the underlying problems are far from being resolved. Ukrainian President Petro Poroshenko accused Russia's Vladimir Putin over the weekend of planning to destroy his country as outbreaks of fighting continued to flare in eastern Ukraine. "Investors are not blind," said RBC Capital Markets head of Emerging Markets Research Daniel Tenegauzer. "They know this (the Ukraine crisis) is not going away any time soon." They also know that eastern European shares jumped 25 percent during the ECB's last round of cheap long-term funding, 5 percent more than emerging stocks overall and even outpacing stocks from the euro zone itself. Central and eastern Europe's central banks are also riding in the ECB's slipstream, opening scope for market-supportive rate cuts. Reuters polls show Poland and Romania are expected to cut interest rates further in coming months. Hungary finished its easing cycle in July after two years of cuts, but has pledged to increase cheap funding for commercial banks. Reuters data also shows Poland and Hungary have some of the fastest improving company earnings. Asked whether he thought eastern European stocks were coiled for a period of catch-up, Societe Generale's Benoit Anne replied: "Definitely." "I am quite bullish," he said. "Particularly in light of the signals coming from the ECB... And anyone who is worried about the situation in Ukraine has probably marched out already anyway." (Additional reporting by Vikram Subhedar in London and Sandor Peto in Budapest; Editing by Ruth Pitchford)
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