As we mentioned in the previous quarterly report, it was quite difficult to find any meaningful reasons behind the divergence of the developed and developing markets. In the third quarter developed markets hit all time high values – with very stretchy valuations -, while developing markets struggled to increase their values. The lagging and previously totally ignored commodity and financial sectors made a great comeback, and as local markets have significant exposure to these sectors, the end of the year was very successful for Nestor Osteuropa Fonds.
The main driver behind the sector rotation was the vaccine against the Covid virus, successfully discovered by well-known international pharma giants, Pfizer, Moderna and AstraZeneca. Investors are always buying the future, and thanks to the potential of massive protection against the virus, commodities and financials started to be priced as the winning sectors of a great economic recovery. The new president elected in United States was welcomed by markets: the potential of a new fiscal stimulus was priced in very fast. Fiscal and monetary packages introduced in 2020 support equity markets, as we have never seen so much liquidity in the financial markets before. As bond yields are at historical low worldwide, investors are looking for anything that might have a potential upside.
As Nestor Osteuropa Fonds’ main investment country is Russia, the price of oil is essential for the Russian assets. The price of oil rose 30 percent, the price of copper 17 percent, and nearly every basic commodity had a very significant rebound (except gold). Central European banks – which were priced at a historical low based on their price to book value ratio – were the most beneficiary equities in the regional catch up.
Nestor Osteuropa Fonds increased its value by more than 19 percent. Best market in the fourth quarter of 2020 was the Hungarian market. The BUX Index (in EUR term) rose 27%, the Czech market grew by 22%, the Polish 14%, while the Russian 12%. Best performing equities were banks; the Hungarian bank giant, OTP itself was able to increase its value by 40 percent, Polish financials PKO, PZU and Pekao all finished the quarter with more than 20 percent appreciation, while in the Czech Republic Erste and Komercni Banka lead the tremendous performance of the Index. In Russia, the best single equities were steelmaker companies (Magnitogorsk, Novolipetsk), Norilsk Nickel and Gazprom. It was hard to find single equities with negative returns, but Polyus (gold producer in Russia), CD Project (game maker in Poland) and InterRao (electricity distributor) were among the worst performing ones.
Nestor Osteuropa Fonds started the last quarter with a heavy overweight position in Poland, mainly in the banking sector. Russia had an underweight position, but in November we cut back Hungary to Neutral, realized some profits in Poland, rebalanced Russia (sold InterRao), and the free cash was spent on Russian commodity companies (Lukoil, Gazprom, Norilsk) and Sberbank. Now, even after the great performance in last quarter, we still prefer cyclical names like banks (Sberbank, Bank Pekao, Bank PKO and Alior Bank), commodity players (Lukoil, Gazprom, Gazprom Neft, Rosneft). In Poland we increased our position in CD Project, as we believe that every bed news should have priced in the doubtful release of Cyberpunk 2077 game. If the economic recovery continues, the rotation between growth and value stocks should continue.
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.