History sometimes repeats itself. Central European markets soared in the second quarter of 2019 after an outstanding performance in the first quarter of the year. NESTOR Eastern Europe increased 8,78% in EUR terms, consequently, the fund returned a highly positive performance of 21,28% in the first half of 2019 for the investors who dared to participate in the Central European catch-up story. Although many uncertainties remained in the last quarter, the central European local markets – especially the Russian one – ignored them. The multiple news that influenced the global markets ranging from the trade war between the US and China to the bans against Chinese companies and falling commodity prices haven’t influenced the positive sentiment on Central European markets.
The Russian stock market was the best performing one; the RTSI Index rose 13,8% in EUR terms. The star among the winners was the stock of Gazprom, which due to increasing its dividend pay-out ratio as well as attempting to reform its corporate governance, saw its price climbing 60% in one quarter. Novatek, X5, Federal Grid, InterRao and other electricity distributors were among the stocks witnessing a great quarter. Laggers were Lukoil, Alrosa and Lenta.
In Poland, the Czech Republic and Hungary, the stock markets underperformed the Russian one, a phenomenon similarly observed in the first quarter of the year. The Polish stock market increased only 2,1%, while Hungarian and Czech markets fell 3,79% and 1,61% in EUR terms respectively. In this quarter no important corporate or political news were observed.
The strategy of the second quarter was to follow the price of oil. Therefore, big Russian oil names (Lukoil, Rosneft, Tatneft) were sold initially to increase our liquidity position and to wait for a better opportunity to enter the market at lower levels. In June, we partly started to initiate positions in the aforementioned names. After the tremendous increase in Gazprom’s price, we had to reduce our position mainly to conform with the regulation capping the weight of one position to a 10% limit.
Our main bets are changing. While we heavily underweighted Poland and overweighted Russia in the previous years, we minimized the difference between those two countries by the end of the quarter. In the coming months, the NESTOR Eastern Europe would seemingly go underweighting the Russian market and bet on a rising Polish market. Given the current oil price, the Russian market looks toppy; on the other hand, Poland’s strong GDP growth should support a better performance for the country’s stock market. In sectorial bets, we mostly prefer Russian electricity distributors.
Investors face high risk – high return potential investing into Central European Equities via NESTOR Eastern Europe. The Central European region is supported by extreme high dividend yield - mostly provided by Russian companies -, a significant capital inflow, and above average GDP growth.