Czech Stocks to Benefit as Election Puts Tax Pledge on Hold

Czech shares may get a boost after parties pledging to increase company taxes failed to gain control of parliament in general elections, according to the chief economist at BH Securities in Prague.

The Social Democratic Party, who vowed to raise taxes on utilities and banks to as much as 30 percent from 19 percent, won 50 of parliament’s 200 seats in the Oct. 25-26 election. While they gained more than any other party, they didn’t garner enough to secure a majority with the help of their favored pre-ballot choice, the Communists, who came in third with 33 seats.

“Tax increases for big businesses are now off the table,” Vojtech Benda at BH Securities stock brokerage said by phone today. “That is positive for Czech stocks.”

CEZ AS, the nation’s largest power producer, Komercni Banka AS, a unit of Societe Generale SA, and Telefonica Czech Republic AS, the country’s biggest phone company, have all underperformed industry peers in the past year amid a record-long recession and campaign pledges by leading parties to raise corporate taxes.

The Czech stock market is closed today for a state holiday and will resume trading tomorrow.

CEZ has tumbled 29 percent in the past 12 months, the worst performance among 16 global industry peers tracked by Bloomberg. Western Europe’s Stoxx 600 Utilities Index, which CEZ joined on Sept. 23, has gained about 3.4 percent in the period, data compiled by Bloomberg show.

‘Slightly Positive’

Komercni’s 10 percent gain in the past year compares with a 25 percent rally for the Stoxx Europe 600 Banks Index. Telefonica Czech shares are down 18 percent in the period, while peers in Europe have gained 24 percent.

Most opinion polls favored the Social Democrats and the Communists for the majority of seats in the legislature. The parties had planned some tax increases and higher public spending to boost the economy after a three-year austerity program by the previous administration helped trigger an 18-month recession, which ended in the second quarter.

Social Democrats are seeking to form a government supported by billionaire Andrej Babis’s pro-business ANO party, which rejects tax increases, and by the Christian Democrats. ANO came second in the ballot, winning 47 mandates in the parliament, while the Christian Democrats will have 14 deputies.

“The overall result may be slightly positive for market sentiment,” Marek Drimal, a Prague-based economist at Komercni Banka, said in a phone interview yesterday. “Any government will raise public spending, but with Babis now being a key player, the funds are more likely to go into things like transport infrastructure rather than social benefits. Taxes may increase, but not as much as the Social Democrats planned.”

To contact the editor responsible for this story: Wojciech Moskwa at wmoskwa@bloomberg.net

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