Finally, after two consecutive quarters of negative performance, the Russian market posted a positive performance in the third quarter of 2017, fulfilling partly our expectations. We believe that the most of the bad news are currently priced in the stock prices and that investors started to focus again on the cheap value of the central European investments and not on their geopolitical risks. Despite the new sanctions by the US and the EU introduced this summer, we observed a great rebound in Russian equities.
All in all, the Russian equities performed well, similar to other Central European stock markets in Poland, Hungary and the Czech Republic. In the third quarter of 2017, the Russian market grew nearly by 10% in EUR terms. Other Central European markets also did quite well in EUR terms: the Polish WIG20 Index advanced by 4.6%, the Hungarian BUX Index strengthened by 5.07%, while the Czech PX Index experienced a 7% increase.
NESTOR Eastern Europe Fund grew by 7.8% in the third quarter of 2017. We would like to remind our investors that the NESTOR Eastern Europe Fund did not have any exposure to the Romanian and Turkish markets. Due to growing regulatory risks in Romania and overheated economic signs in Turkey, the Fund is not willing to invest into these countries for the time being.
The weakness of the US dollar had a negative effect on the NESTOR Eastern Europe Fund’s performance, as most of the Russian equities are denominated in USD and listed on the London Stock Exchange.
Although the main Stock markets in the developed countries had a slight positive performance in the third quarter, the Central European region’s outperformance was significant.
The outperformance was attributable to the following reasons:
- Significantly better results during the earnings season of the second quarter of 2017
- Strong capital inflows into the Central European equities
- The rally in Brent Oil and other main commodities prices (e.g. copper, aluminium, etc...)
- Investors shift of focus to companies’ valuations
- Relatively quiet quarter for Russia from a geopolitical perspective
- Dividend pay-out season ended in the third quarter and investors realized the high level of dividend yield (the Russian market runs with a 6% dividend yield, while the total portfolio of NESTOR Eastern Europe Fund runs with close to 4% dividend yield)
Best performers on the Russian market were financials and basic metal related companies (e.g. Sberbank, Tinkoff Bank, Severstal, Norilsk Nickel and Magnitogorsk). On the contrary, oil and gas companies underperformed the whole market. NESTOR Eastern Europe Fund was overweight in the aforementioned names. On the other hand, the overweight positions in TMK and Aeroflot had a hard time during the quarter losing 10% and 5% from their values respectively. Generally, NESTOR Eastern Europe Fund is overweighting the Russian market, as fundamentals still signal a huge upside potential for the Russian market. All of the financial multiples show very low valuations both in historical and relative terms.
In Poland we observed again a significant inflow into local equities. Consumer goods related companies (LPP, EuroCash, and CCC) performed well, while financials – because of the CHF-saga – underperformed the average market. NESTOR Eastern Europe Fund is underweighting the Polish market, as all of the aforementioned consumer goods equities were sold during the last period due to extreme high valuations. Polish banks are getting cheaper, but it is difficult to determine the good entry point until the final regulation of the CHF-burden is considered by the government.
The Hungarian market grew on the back of the appreciation of MOL and OTP. NESTOR Eastern Europe Osteuropa Fund is neutral at the moment on the Hungarian market.
As usual, NESTOR Eastern Europe Fund was managed in a very active way. In the beginning of the quarter, we increased our bet on Sberbank up to the limit, bought Tinkoff Bank, Magnitogorsk and Sollers in Russia, Kruk in Poland, OTP and MOL in Hungary. Meanwhile, we decreased the polish banks positions. At the end of the quarter, we totally sold LPP and EuroCash and decreased the weight of CCC in the portfolio. From a trading point of view, we realised profit on companies like Genel, Rushydro, Enel Russia and Kruk. Gradually, we increased our bets on Russian oil names. We still believe that active portfolio management has a serious added value.
At the moment we spot a huge divergence between the price of oil and the price of oil related companies. Although Brent is at a high level similar to the end of 2016, the oil giants posted a double digit negative performance. One of our main bets at the moment is that this valuation gap should disappear in the near future. We are overweighting the Russian oil companies (e.g. Lukoil, Rosneft, and Transneft) and still keeping our long positions in Russian basic resources companies. Poland remains underweighted, mostly because of the abnormal high valuation of consumer goods companies.
NESTOR Eastern Europe 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.