NESTOR Eastern Europe - Quarterly Report 3/2020

The financial markets were absolutely tumultuous in the third quarter of 2020

The financial markets were absolutely tumultuous in the third quarter of 2020. Initially, the world’s main markets hit some new all-time highs bolstered by the outstanding performance of the technology stocks. Nevertheless, in the second half of September, a steep correction was witnessed making some investors start believing that it is like the beginning of the Armageddon. However, financial markets calmed towards the end of the quarter and consequently all main indices realized positive quarterly returns.

While the developed stock markets performed quite well, developing markets were struggling to finish the third quarter with a mere positive return. It is worthy to note that the divergence is getting extremely huge, e.g. the difference between the year-to-date performances of some stock markets has surpassed 30%. This huge gap could help visualizing how international investors were disinterested in the emerging stock markets and how they completely ignored the Central European Region. A numeric example is needed here to illustrate this point: the year-to-date performances of the S&P 500 and the Nasdaq US indices are respectively 7% and 27%. On the other hand, the Russian, Polish and Hungarian Indices posted year-to-date losses of -24%, -20% and -27% respectively. Such a big gap in the performances hasn’t been witnessed for a long time.

Nestor Osteuropa Fonds posted a negative return from July to September and the Net Asset Value of the Fund decreased by 11,44%. Every investment target country had a double-digit negative return in the last quarter. More specifically, the blue chips of the Russian market performed very poorly as the stocks of Gazprom, Lukoil and Tatneft lost more than one fifth of their market capitalization. This phenomenon was extended to the Polish market where Lotos and PKN lost one third of their respective market value. Additionally, the banking sector in the Central European region was hit by sellers. There were some relatively well-performing names (e.g. KGHM, Polyus), but the overall picture was very gloomy.
It is quite perplexing trying to find any meaningful reason behind this kind of divergence between markets. The main driver of the Russian market, the price of oil, has not changed significantly during the previous quarter. Every local government and central bank introduced serious stimulus packages trying to reboot their economies, and the result itself is not worse than in developed markets. Political risk is still high, but it has not grown significantly compared to the previous years. The second wave of the Covid pandemic is not worse than in the US or in Western Europe. All in all, it seems that foreign investors are just reallocating their funds from the emerging markets to the developed ones. The main question is how long this process will last and when financial investors will take a look at the depressed valuations of these markets.

Nestor Osteuropa Fonds increased its overweight position in Poland, and also increased its underweight position in Russia. Poland has one of the highest GDP growth in the region, while in our view, Russia faces a risk of a new downturn in the price of oil. As for individual equities, we prefer cyclical names like banks (Sberbank, Pekao, Erste Bank, Bank PKO and Alior) and consumer related companies (e.g. CDR in Poland and InterRao in Russia). If the economic recovery materializes, a rotation between growth and value stocks should start.

Investors investing into Central European Equities via Nestor Osteuropa Fonds still face high risk – high return potential.

Peter Elek, Dialog Investment Management Ltd.