Last quarter of 2021 was quite hectic on the Central European equity markets. While nearly every developed market index rose to lifetime high levels, regional stock exchanges suffered losses. In the normal world markets were influenced by inflation and the new omicron covid virus mutant fears, but on the Central European markets the main risk was the so called emerging market risk: political and regulatory risks overweighted the potential of normal valuations of local companies.
The reason why I myself as a portfolio manager really do like Central European companies is seeing and experiencing the development of companies. Behind the basic valuation numbers (sales, EBITDA, net cash flow, dividend yield etc) listed companies – especially the Russian ones – continuously improving their skills in corporate governance, public relations, communication with investors. Probably this information might be surprising, but regional O&G and mining companies has introduced a world leading investment plan to reduce their carbon emission by 2030 and beyond. It is very much satisfying to see how big companies trying to act and behave market and environmentally friendly. Another surprising gem about the Russian market: it is not only a “gas and oil and mining” market anymore. Yandex or Tinkoff Bank for example pioneers in IT and fintech solutions, companies with innovation hardly could be found anywhere in the world. Tinkoff Bank itself has half of market capitalization of Deutsche Bank, and Tinkoff Bank was established only in 2005.
The most negative point of these market is, with no doubt, politics. Investors – nor the regionally listed companies – cannot be prepared what the actual political leadership want and will do to demonstrate their power. Unfortunately, this happened during the last quarter nearly in every regional country. Surely, the most significant role came to Russia again, as well. The military activity that Russia did in the last months next to the Ukrainian border, potentially signalling an invasion on an independent country in 2021 was not acceptable for most of foreign investors. The growing geopolitical risks played the main role, and in an investment environment like this there is no reason speaking about well managed companies or nearly double digit dividend yields, nor about decade high gas and electricity prices in Europe.
The worst performing market in the Central European region was the Russian one, which lost more than 8 percent of its value. Hungarian market fell 6,5, the Polish one only 1,5 percent in the last quarter of 2021. The Czech market this time significantly outperformed its peers, it grew nearly 10%, mainly thanks to one company, to the vertically integrated electricity company CEZ. Some other equities were able to increase their value, mostly Polish banks, while nearly every Russian big name had to face a double digit loss. Nestor Osteuropa Fonds lost only 3,4% of its value, outperforming its benchmark.
As it was difficult to find the balance between risks and valuations in this period, there were mainly only trading positions, generally the portfolio hasn’t been changed. We have a slight underweight position in Russia and Poland, while a small overweight in Hungary and the Czech Republic. We continue to believe that Russian steelmakers (Magnitogorsk, Severstal and Novolipetsk) are extremely cheap. In the upcoming months we would like to see how the military situation will be solved and make a bigger a rebalancing in the portfolio only then.
Investors investing into Central European Equities via Nestor Osteuropa Fonds still face high risk – high return potential. With increasing commodity prices, the potential of higher-than-average dividend yields should support current valuation of Central European financial markets.
Peter Elek, Dialog Investment Management Ltd.