NESTOR Eastern Europe - Quarterly Report 4/2019

The investors of the NESTOR Osteuropa Fonds enjoyed decent returns in the last quarter of 2019 as the fund grew by 8,48% to end the year with a positive performance of 30,48% in EUR terms.

The Central European Market outperformed the majority of the developed as well as the emerging markets. The main factor that fuelled that good performance was the prospects of reaching a trade deal between the United States and China leading to an end to the ongoing trade war between the two giants. Consequently, the US markets hit all-time highs and this friendly investment environment led to the rise of local equity indices worldwide.

The Russian market continued to be the best performing market in the region: the RTSI Index increased approximately 13% in the fourth quarter posting an annual increase of 47,9%. In 2019 the Russian market was the second-best performing market globally, only preceded by the Greek equity market. The Polish market could not post more than 1,6% increase in the last quarter of 2019 ending the year with a negative performance of -4,5% and was underperforming significantly its’ peers. The Polish banks, which constitute the biggest sector in the stock market, suffered significantly due to the uncertainty surrounding the CHF loans in the banking sector. From our point of view, the Polish equity market, especially the banking sector, is getting very cheap. We believe that the Polish market is experiencing a very similar situation like what happened in 2010-2011 in Hungary, when the Hungarian government introduced heavy tax burdens to nearly all listed companies. The history tells us that it’s a very good entry point to invest in undervalued assets. The remaining CEE equity markets performed as follows: the Hungarian market grew 14,85% in Q4 and 14,33% in the whole year, while the Czech market was up 8,7 % and 14,51%.

Although the value of the Russian market tripled in the last three years, we could not label it as an expensive market. For instance, the forward P/E ratio of the Russian market remains low and is less than the half of its S&P 500 counterpart. Moreover, the Russian market enjoys a high dividend yield of more than 7%. It seems that many investors have revalued their risk/return expectations for the Russian market and we see continuously inflows into this equity market. The Russian market’s risks remain very high, nevertheless, a potential increase of the oil price in the near future due to geopolitical risks can give another trigger to the Russian market.

We started the last quarter with nearly a neutral positioning in all countries. Although increasing Poland from underweight to neutral and cutting Russia to neutral did not contribute considerably to the positive performance of the last quarter, stock selection played a considerable role. We put a bet on underweighting the Russian steel sector (Magnitogorsk, Novolipetsk and Severstal), and increased our positions in Russian utilities (InterRao). The good trading in the names Yandex, Detsky Mir and Halyk Bank added good value to the Fund’s performance.

Investors face high risk – high return potential investing into Central European Equities via Nestor Osteuropa Fonds. The Central European region is supported by extreme high dividend yield mostly provided by Russian companies, a significant capital inflow, and much above the average GDP growth.