The Central European markets enjoyed a high performance in the first quarter of 2019. NESTOR Eastern Europe increased 11,49% (in EUR terms), which could be considered as one of the best quarters in last years. The optimism in the financial markets was fuelled by the new comments made by the FED Chairman, Jerome Powell, who avowed that interest rates will be on hold in the near future. The rising possibility of ending trade war between the US and China has given the stock market similarly a positive momentum. A strong US Dollar did not stop local currencies from appreciating; a phenomenon that hasn’t been observed for a while. Nonetheless, the political landscape of the region was really quiet as no new sanctions were introduced against Russia. Rising equity prices were supported by strong inflows into Emerging Markets.
In Russia the stock market benefited from rising commodity prices. The price of Brent oil grew by 27% quarter by quarter. The best performing Russian Oil & Gas stock was Lukoil, which overperformed considerably the general market. Sberbank, which had a lagging price performance during the last year, benefited from selling Turkish Denizbank at a higher price than what the market anticipated. Russian stocks had a great performance in the first quarter of the year, increasing 14,30% in EUR terms.
The Polish, Czech and Hungarian stock markets underperformed the Russian one. The market in Poland grew by only 1,5% while the Czech and Hungarian markets increased by 8,5% and 6,4% respectively in EUR terms. No major political or corporate events occurred during the quarter.
We made several changes in the portfolio during that period. The Polish retailer segment (CCC, LPP) was bought, Russian Oil & Gas was rebalanced, and we took profit in Hungarian OTP Bank, in the Russian Sberbank and in Bank St. Petersburg. We sold every piece of Phosagro (Russian fertilizer producer), as the outlook for the industry looks very challenging. We increased the weight of the Russian aviation company, Aeroflot, in the portfolio. We traded actively many Russian companies during the quarter, especially in the steel and mining sector.
The outlook for the region remains the same. Investors face a high risk – high return potential investing in the Central European Equities via NESTOR Eastern Europe. The valuations of the developed stock markets are getting stretched which make them prone to another correction in the near term. Nevertheless, the cheap valuations of the Central European markets underpinned by an extremely high dividend yield could make the stock markets of the region more resilient to such correction.