The last big correction that occurred in the world financial markets was early 2016. Since then, markets were growing in a very benign environment. In the first quarter of 2018 many international events influenced markets and international and local news kept investors’ nerves under water.
The main “blow” came from the US, where President Trump initiated a hardly understandable trade war against the whole world. It could be argued that the main aim of the introduced import tariffs was to decrease the trading deficit with China; however, living in the globalized world of the XXI. Century, the imposed tariffs on aluminium and steel caused a panic sell-off in the world stock markets at the end of January 2018.
Another reason for the falling prices was the “Facebook-effect”. As it came clear that the company did compromise the privacy rules of its users, the trust in the whole Social Media sector was broken. This sector has grown extremely big in the last years and consequently the impact on world markets was really huge.
Moreover, some bad news came out from the region itself as well. The world’s largest nickel producer, Norilsk Nickel, announced that one strategic owner is willing to sell its stake in the company. The biggest Central European drug maker, Richter, informed investors about a potential cancellation of its leading product Esmya. Russian Telekom operator, Megafon, unexpectedly decided not to pay dividend after its 2017 annual profit.
Last but not least, the news surrounding new sanctions imposed on Russia as well as an imminent cold war after the Skripal Case worsened the situation.
Despite the challenging international investment environment, Nestor Osteuropa Fund had a good quarter. The Fund lost only 0.28% of its value in the first quarter. The worst performing markets during the period were Poland (-10.94% in EUR terms) and Hungary (-5.96% in EUR terms). The best performing market was Russia (+5.55% in EUR terms) followed by the Czech Republic (+4.79% in EUR terms).
As disclosed in our previous communications, we started the New Year with an underweighted position in Poland, neutral positions in Hungary and in the Czech Republic, and a significant overweight of the Russian market. During the period, we gradually decreased our bets in Russia, took profit in Norilsk Nickel and in the steel names (Novolipetsk, MMK, Severstal) and TMK. Moreover, after the price of oil reached 70 USD per barrel, we took the profits in the Russian Oil Sector (Lukoil, Rosneft and Transneft) and halved our positions in Aeroflot and Megafon. On the buy side, we built up some positions in the Bank of St. Petersburg, Bank of Georgia and Unipro Russia.
Apart from the Russian market, we made trades in Polish Alior Bank, KHGM, Kruk, Lotos and PZU, in the Hungarian oil company, MOL, and in Richter. Overall, as investors could have observed in the past, we were very active in trading, and tried to follow company news and fundamental changes as fast as possible. This is the main added value of active portfolio management. We still believe that active portfolio management remains the future of the investment industry.
At the end of period we decided to decrease the weight of the equity investments and increase the weight of cash in the portfolio. We still believe that the region is very promising with a considerable high dividend yield. Nevertheless, in short term we think it is better to sit on a higher amount of cash and wait for a good entry point.
NESTOR Osteuropa Fund offers investors a balanced portfolio with a high exposure to the Russian market, but balanced with less risky Central European assets in Poland, Hungary and in the Czech Republic. NESTOR Osteuropa Fund has still no exposure to Turkey.