The last quarter of 2017 witnessed many events but the end result was a flat market as well as a flat performance of the NESTOR Osteuropa fund. We kept our same view on the Central European markets, with neutral positions in Hungary and the Czech Republic, significant overweight of the Russian market and a decent underweight of Poland.
The best performing markets in the last quarter were Hungary and the Czech Republic, which increased (in EUR) 5.9% and 4.9% respectively. The Polish market experienced a small increase (3.6% in EUR), while Russia – again – was underperforming other markets (-0.3% in EUR). NESTOR Osteuropa fund appreciated last quarter by 3.5% in EUR terms. This performance is considered acceptable; nevertheless, it didn’t match our expectations which were much higher for the quarter.
The pivotal event of the last quarter was the reporting season. Generally, the results were good coming mostly above analysts’ expectations. On the other side, some of the numbers were reportedly poor, especially in Russia and Poland.
The biggest blow in the last quarter came from Magnit, the biggest Russian cash and carry retail chain. After missing forecasts, the stock fell around 40% resulting in the relatively poor performance of the Russian market. There was a silver lining for the fund as Magnit was our biggest negative bet. Besides, Rosneft and VTB Bank missed analysts’ expectations in Russia. In Poland, PKN Orlen and most of the retailers (EuroCash, CCC and Poland) fell short of expectations.
On the positive side, extremely good results were published by Sberbank, Lukoil, most of the Russian steel and basic resources producers (Magnitogorsk, Novolipetsk, Severstal and Norilsk Nickel) and the Polish Banks. Our top bets are still the aforementioned Russian companies. Due to those positive bets, the NESTOR Osteuropa fund’s performance was in line with the local market average.
At this point it’s worth pinpointing the current divergence between spot oil prices and the valuation and price performance of giant oil companies. While Brent oil price closed at year high, nearly all of the local oil players finished 2017 in the red zone. Valuation for these companies are close to historic lows, while dividend yields are at historic highs. For the first time in a decade, we could observe backwardation in oil futures prices.
In summary, the following points should be influencing the Central European markets in the coming quarter:
- In general, significantly better results during the earnings season of the third quarter of 2017 should linger; it was the fifth better-than-expected reporting season in a row
- Strong capital inflows into Central European equities could continue (Currently, Poland is the top favourite)
- The rally in Brent Oil and other main commodities prices (e.g. copper, aluminium, palladium, platinum, steel) should support valuation and prices of Russian producers
- In March there will be presidential elections in Russia. No one expects a surprise here as it is really hard to imagine that Vladimir Putin will not be re-elected
- Dividend yields: the Russian market offers an extremely unique dividend yield. Many companies increased the level of dividend-payout ratio. Due to this fact, the Dividend Yield in Russia is currently above 6% in USD terms. Nonetheless, this high nominal value could be more appreciated if it is compared to the close-to-zero yield levels in the bond markets
- Geopolitical risks remain the same: Syria, North Korea and sanctions against Russia. According to media reports, there is a stronger lobby from the Western European companies to ease the sanctions, though the US is still advocating keeping the sanctions for a longer period of time
In the last quarter of 2017 we had not made any country reallocation; our top favourite is still Russia, while the least preferred market is Poland. We like commodity players in Russia, and Sberbank. We have quite many off benchmark bets in Russia like Aeroflot, Sollers, TMK Holding, OGK2 electricity distributor and Megafon.
In Poland, our top positive bets are in the Polish banks (Alior and Bank Pekao), while local retailers like EuroCash, LPP and CCC are underweighted. We initiated a new negative bet in the last quarter against PZU, the biggest Polish insurer.
In the Hungarian market, we cut back our position in MOL and increased our position in Richter. NESTOR Osteuropa fund is neutral at the moment on the Hungarian market.
As usual, NESTOR Osteuropa fund was managed in a very active way. In the beginning of the quarter, we increased our position in Sberbank up to the limit. Moreover, we bought Evraz, Magnitogorsk, Norilsk Nickel, and Lukoil in Russia. After a correction we increased our position in Aeroflot. We realised the profits on many companies like Rossetti, Rosneft, Tatneft, Lenta and Surgutneftegas, and we reinitiated our position in Rushydro. Gradually, we increased our bets on Russian basic resources names. In Poland, we bought Kruk, Kernel and PKN. In the Czech Republic, we cut our position in Moneta Bank to zero.
We still believe that active portfolio management has a serious added value.
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.