Prague Stocks Jump Most in 21 Months as Election Halts Tax PushKrystof Chamonikolas
Czech shares surged the most since January 2012 as political parties promising to raise company taxes failed to gain control of parliament in general elections.
The PX index jumped 2.7 percent, the biggest gain among 94 global gauges tracked by Bloomberg after Cyprus and Venezuela. Komercni Banka AS, a unit of Societe Generale SA, increased 4.1 percent to a record 4,690 by the close in Prague as Goldman Sachs Group Inc. and Deutsche Bank AG recommended buying the stock. Power utility CEZ AS added 6.5 percent, its best day since 2009. Czech sovereign bonds gained while the koruna fell.
The Social Democrats, or CSSD, and Communists, who planned to increase taxes on utilities and banks, received a combined 88 of parliament’s 200 seats in the Oct. 25-26 election, after most opinion polls favored the two parties to get a majority. Having won the vote with 50 seats, the CSSD is now seeking to rule with the support of billionaire Andrej Babis’s pro-business ANO party, which rejects higher taxes, and the Christian Democrats.
“It would be hard for the Social Democrats to levy special company taxes in this setup,” Petr Bartek, an analyst at Ceska Sporitelna AS in Prague, said in a report to clients today. “That is good news for the Czech stock market.”
The bourse was closed yesterday for a state holiday.
A leadership struggle within the Social Democrats that broke out after the snap election complicates the search for partners to help the party form the country’s ninth government in 10 years. The previous administration of Prime Minister Petr Necas collapsed in June amid a spying and corruption scandal.
Investors have ignored Czech political instability as the economy doubled in size between 2003 and 2012 to $196 billion, World Bank data show. The nation’s debt holds the highest credit ratings in emerging Europe, along with Estonia, and is cheapest to insure against non-payment with credit default swaps.
“The fragmentation of parliament means that another early election can unfortunately not be ruled out,” Bartek said. “Such a scenario would prolong the uncertainty and nervousness, albeit with relatively limited impact on the economy.”
The yield on the government’s five-year koruna notes fell three basis points, or 0.03 percentage point, to 1.11 percent, headed for a five-month low and compared with similar securities trading at 1.13 percent in France. The Czech default swaps were little changed at 60 basis points, just above higher-rated France, data compiled by Bloomberg shows.
The koruna depreciated 0.1 percent to 25.756 per euro after Deputy Governor Vladimir Tomsik said in a Bloomberg interview published today that central bank interventions to weaken the local currency are “still very probable” as policy makers seek to lift inflation toward the bank’s target.
CEZ, the largest Czech power producer, Komercni Banka and Telefonica Czech Republic AS, the biggest phone company, have underperformed industry peers in the past year amid a record-long recession and as the Social Democrats pledged to raise the tax to as much as 30 percent from 19 percent.
The utility has tumbled 23 percent in the past 12 months, the most among 16 global industry peers tracked by Bloomberg and compared with a 4.8 percent gain for western Europe’s Stoxx 600 Utilities Index that CEZ joined on Sept. 23. Komercni Banka’s 15 percent gain lags a 26 percent rally for European peers.
Komercni Banka was raised to buy from hold at Deutsche Bank today, increasing its share-price projection to 5,300 koruna from 4,000 koruna in a report to clients. Goldman Sachs lifted its 12-month projection for Komercni to 5,300 koruna from 4,850 koruna in a note dated yesterday.
Czech stocks represent a “buying opportunity” as the risk of higher taxes has declined while the central bank is showing readiness to support the economic recovery with koruna sales, London-based strategists Carsten Hesse and Mateusz Zawada at Czech brokerage Wood & Co. wrote in a report to clients today.
“Investors can take a breather,” they said. “The worst-case scenario for Czech equity investors has been prevented.”