Although, from the first look, it might appear that the equity market didn’t witness many changes in the last quarter, this sideway market was very exciting. The main influencers were – again – mostly political issues, with deepening fears of the global economy entering into a recession.
Capital Markets fluctuations were mainly driven by the US-Chinese trade war and rate cuts in the US and Europe. The developments in the trade war between US and China changed the investors’ risk appetite from one day to another and it was very difficult to follow it. Fears from a potential global recession drove government bond yields to historic lows in Europe: the 10-year German Bund’s yield fell to -0,7%, notwithstanding the fact that German macro data that were published during the quarter signal a significant slowdown in the German economy. It is quite an arduous task to find an economical reasoning explaining the actual state of the bond market with yield curves completely in minus territory. Nevertheless, such a bond market could constitute good news for the regional equity markets due to their relatively high dividend yield. With a dividend yield still higher than 5% annually, this gives regional equity markets a significant comparative advantage compared to government bond markets.
The only market in the Central European region that finished in the green zone in the third quarter of 2019 was the Russian one, with a 0,66% return. All other markets had a negative performance: the Hungarian and Czech markets decreased by 2,76% and 1,34% respectively, and the worst performer was the Polish market which dropped 9,33%. Although most of the Central European indexes ended in the red zone, NESTOR Eastern Europe fund finished lower only by 0,73%. All returns are in EUR.
The Polish, Czech and Hungarian markets underperformed again the Russian one, a phenomenon similarly witnessed in the first and second quarters. The decent correction of oil price this year did not deter the Emerging Market investors away from the Russian market. In the Emerging Market universe, the Russian market is the most overweighted market. The poor performance of the Polish market could be mainly attributed to the current negative outlook of the banking system, as the government is willing to clean up banking sector’s balance sheets from the CHF denominated loans, and this would cause a significant loss to Polish banks.
In our last published report, we highlighted that we have changed our main bets minimizing the difference between the weights of the Russian and Polish markets. Although the Polish market has become quite cheap, we are waiting for the moment to add Polish equities in the portfolio. Polish Banks are currently trading with a Price to Book value ratio below 1, while net interest margin and return on equity ratios are still high. Therefore, we believe that if the CHF burden story ends, Polish banks might offer a good investment opportunity.
This quarter was characterized by active trading in the fund. Stalproduct from Poland was the only new stock added to the portfolio while we closed our bet in Genel. Moreover, we decreased the position in Aeroflot and in Surgutneftegas and increased our position in the electricity distributor IRAO AO. Generally, we have started to decrease step by step the overweighed position in Russia by closing long positions.
Investors face high risk – high return potential investing into Central European Equities via NESTOR Eastern Europe fund. The Central European region is supported by extreme high dividend yield - mostly provided by Russian companies -, a significant capital inflow, and much above average GDP growth.