Review of first quarter of 2020
The first quarter of 2020 has witnessed a market collapse not even observed during the financial crisis 2008-2009. The financial markets were falling so rapidly that almost every risky asset lost about more than one third of its value. Clearly, the main reason behind this phenomenon was the coronavirus that appeared in each and every developed and emerging country. Though the first cases caused by the virus started in China at the end of the last year, for quite a long time it looked like the pandemic will be isolated. Unfortunately, in early march, the coronavirus cases started to grow up exponentially in Europe (Italy, later Spain and the UK). The financial markets started to feel the pain in the second half of March when the US stock market indices fell from all-time highs losing 30-40% in only two weeks.
Nevertheless, the coronavirus was not the only reason for the poor performance of the regional stock market which faced a double whammy. In early March, the OPEC+ countries couldn’t strike an oil production cut bargain, mainly because Russia decided not to enter a new deal. Although the objective of Russia was reasonable – to stop growing market share of US shale oil producers –, the timing has been proved to be extremely harmful. As far as the biggest proportion of the investments in NESTOR Osteuropa Fonds are allocated to Russia, the freefall of the Russian oil producers had a very negative impact on the portfolio’s Net Asset Value.
NESTOR Osteuropa Fonds lost 38% of its value in the first quarter of 2020. All major stock markets of the region posted double digit losses, nevertheless, surprisingly Russia was not the worst performer even after losing 33% in EUR terms. The stock exchanges of Poland, Hungary and the Czech Republic recorded even higher losses. The worst performing market sectors were the Russian oil producers, which lost more than 40% of their respective market value, as well as the Polish banks.
The current market situation could be only deemed as uncertain as the long-term damaging effect of the coronavirus on the world economy is still ambiguous. In the short-term, it is quite certain that most of the world economies are going to be falling into a recession. Nonetheless, the unprecedented monetary and fiscal stimulus employed by the world central banks and governments could counter the harming effects of the pandemic. Moreover, company valuations look very cheap by historic terms, and the history has shown us that entering a stock market after a fast freefall is a good long-term investment decision. However, the direction of the equity market remains totally uncertain in the next three to four months.
During the last quarter, we carried out some trading with more or less success. With a good timing we decreased our overweight position in most of the Russian utilities and sold Aeroflot. A high amount of cash was kept in the portfolio waiting for a good entry point when the market is bottoming. Near the end of the quarter, we added two Austrian Banks (Erste and Raiffeisen) and ended the quarter being overweight in the Russian market.
Although many developed countries companies decided to stop paying out dividends, the majority of the Russian companies confirmed their intention to pay out the previously announced dividends despite the harsh economic conditions. Consequently, in many cases the current dividend yield has reached a double-digit number. Certainly, next year’s dividend should be much smaller given the challenging economic environment.
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 average GDP growth.
Peter Elek, Dialog Investment Management Ltd.