Sector rotation continued, commodity prices went up, inflation expectations have grown, and this time there were no geopolitical issues in the region. While nearly all important developed stock market indexes hit new all-time highs, this quarter Central European equity markets did a better performance.
The main topic in the second quarter of 2021 was related to the raising inflation expectations. Worldwide, due to the low basis from last year, the published year-on-year inflation numbers hit decade highs. Bond yields went up as markets started to expect a faster than previously anticipated increase in main base rates and a faster tapering (decreasing the volume of quantitative easing). Interestingly, this process is especially beneficial to the following sectors: financials and commodity. The reason for this is that rising interest rates increase financial companies’ margins, and historically higher inflation provides higher commodity prices. Because the Central European region is heavily relied on these sectors, not surprisingly, Nestor Osteuropa Fonds’ targeted investment countries were able to outperform the developed ones. It should also be mentioned that while in developed countries central banks have just begun a verbal communication about a potential future rate hike, in the CEE region the rate hiking cycle has already started: both Russian and Hungarian Central Banks did increase their base rates during the quarter. For the O&G sector a huge potential might be that these companies don’t have to face legal issues due to ESG challenges, like many other Western European companies do.
Another important moment for Nestor Osteuropa Fonds was that the presidents of Russia and the United States achieved their first personal meeting. Although nothing important was declared, the hope for a better relationship between the two countries has grown significantly.
As it is mentioned in every Quarterly Report, Nestor Osteuropa Fonds’ main investment country is Russia, the price of oil and other basic materials are essential for the Russian assets. We saw continuously rising prices in every single main material, but at the end of June the price of Brent oil stood at 75 USD, roughly 20 percent higher than in the previous quarter. There are more and more signs that as oil companies in the last five years extremely cut back their CAPEX expenditures therefore the lack of new oil filed in the future could lead to a serious supply deficit.
Nestor Osteuropa Fonds increased its value by 13,18 percent. The best performing market in the second quarter of 2021 was the Polish market. In EUR term main Polish equities rose by 17% in average, the Czech market grew by 8,19%, the Hungarian by 9,78%, while the Russian market increased its value by 11,03%.
Best performing equities were regional banks and O&G companies. Bank Pekao, PKO, Santander Poland, Gazprom, Lukoil, Tinkoff Bank, OTP Bank and Komercni Banka lead the performance of Nestor Osteuropa Fonds. Lagging names were Tatneft, KGHM, CD Project and Richter.
Nestor Osteuropa Fonds benefited from good single equity selection. Our main bets, Lukoil and OTP did a fantastic job. These bets were cut back in the quarter, and Nestor Osteuropa Fonds started the third quarter with a relatively high cash position.
Investors investing into Central European Equities via Nestor Osteuropa Fonds still face high risk – high return potential. With increasing commodity prices, the potential of higher-than-average dividend yields should support current valuation of Central European financial markets.
Peter Elek, Dialog Investment Management Ltd.