Foto: vinod velayudhan
. Los activos en manos de gestores de private equity de mercados emergentes alcanzan su récord
Preqin’s latest report on private equity in emerging markets (EM) finds that the total assets held by managers based in these regions have increased year-on-year to approach $300bn as of September 2015, the latest data available. The combined AUM of EM-based managers did not see much growth in 2014, rising from $248bn at the end of 2013 to $258bn a year later. Since then, however, total assets have risen $39bn in nine months, to hit record highs.
This increase in AUM comes despite the growing interest shown in emerging markets by fund managers based outside of these regions. The proportion of aggregate emerging markets-focused capital which was raised by managers based in these regions peaked in 2011, when they accounted for 77% of the $69bn raised. Since then, the proportion has fallen year-on-year, and in 2015 EM-based managers accounted for 49% of the $40bn raised. In 2016 YTD, EM-based managers have accounted for just a third (33%) of the total capital raised for emerging markets, an all-time low.
“Emerging markets have developed significantly over the past decade; as many more developed markets have seen slower growth in the wake of the Global Financial Crisis, some economies in emerging regions maintained double-digit growth rates. As such, private equity funds focused on these regions have been able to capitalize on opportunities, and the total assets held by these funds is now just less than $300bn. Recent years have also seen increased participation in emerging markets from international GPs, which are attracted by the robust underlying demographics and potential for strong returns. While managers based in these regions may struggle to compete with the resources of larger market entrants, they might be able to leverage their in-depth local understanding of these markets in order to attract investors.” Says Christopher Elvin, Head of Private Equity, Preqin.
Foto: AwesomeSA
. Vest se alía con DIF Broker para ofrecer inversiones estructuradas basadas en opciones
The international broker-dealer DIF Broker announced that it is partnering with Vest’s technology subsidiary, a digital solutions provider for options-centric structured products. Vest’s technology will power a platform allowing DIF Broker’s financial advisors to customize protective structured options strategies on behalf of its clients throughout the Iberian Peninsula and South America.
The offerings will enable the clients of the broker to access a number of innovative, options-based investment strategies, including those that aim to provide some measure of downside protection. “Our main goal with the new service is to offer a uniquely useful product for our investors,” said Paulo Pinto, Chief Operating Officer at the broker-dealer. “Our dedicated team of investment consultants will be on hand with the aim of offering Vest’s distinctive services in a number of regions where such strategies have previously been unavailable.”
Vest’s technology subsidiary develops technological and software solutions for brokerages and investment advisers alike, allowing them to offer structured notes-like payouts to their customers, using exchange traded options to construct the payouts. It reduces the complexity of options trading while providing investors with targeted protection, enhanced returns, and a level of predictability unattainable with most other investments, says the company.
CC-BY-SA-2.0, FlickrPhoto: Iain Cunningham, Portfolio Manager in its established multi-asset team. Investec Asset Management Appointed Iain Cunningham to its Multi-Asset Team
Investec Asset Management has announced the appointment of Iain Cunningham as a Portfolio Manager in its established multi-asset team. Iain brings an extensive track record dedicated to multi-asset investment, most recently at Schroder Investment Management.
Iain Cunningham will join the firm’s multi-asset investment capability, reporting to Michael Spinks, co-Head of Multi-Asset Growth at Investec Asset Management. The range of solutions managed by the 31-strong team includes total return and relative return growth strategies, as well as defensive income.
Michael Spinks, co-Head of Multi-Asset Growth, commented: “We are excited about Iain joining the team given the asset allocation skills and experience that he brings with him. In addition to portfolio management responsibilities, Iain will help to develop Investec’s multi-asset capabilities globally, with a specific focus on our long-standing relative return growth strategies.”
Iain Cunningham joins from Schroder Investment Management where he spent nine years in investment management roles within the multi-manager and multi-asset investment teams – he co-managed the Schroder ISF Global Multi-Asset Income Fund and was co-manager of the Global Multi-Asset Allocation Fund. Additionally, he managed Global Tactical Asset Allocation mandates; was instrumental in developing Schroders’ Multi-Asset Income franchise; and led currency research for the multi-asset team.
“With today’s low growth environment and uncertain economic backdrop, clients are increasingly looking to target investment outcomes based on risk and return”, said Spinks. “Having managed multi-asset portfolios for over 25 years, our core investment capabilities are firmly established, and Iain will play a key role in helping us to continue to seek strong results for our clients.”
CC-BY-SA-2.0, FlickrPhoto: Ines Hegedus-Garcia
. The Duarte Vasquez Group joins Bolton Global Capital
Bolton Global Capital announced that the Merrill Lynch team of Tanya Duarte and Archibaldo Vasquez has joined the firm’s Miami office. The team manages $225 million in client assets with $2.1 million in annual revenues operating under the name “Duarte Vasquez Group”.
As senior financial advisors with Merrill Lynch for the past 22 years, they have built a broad based international business serving high net worth clients predominantly from Mexico, Colombia, Dominican Republic and the US. Prior to joining Merrill Lynch in 1994, they both worked for 10 years at Chase Private Bank as Team Leaders for various Latin American markets.
“We are honored to have such well respected professionals affiliate with our company and look forward to supporting the continued growth of their wealth management business.” Arturo Vasquez will be responsible for client support operations where he has worked at Morgan Stanley for the past 3 years prior to joining Bolton and with BNP Paribas for 2 years.
With the affiliation of the Duarte Vasquez Group, Bolton continues to establish its position as a premier destination for top wirehouse teams transitioning to the independent business model. Over the past 3 years, the firm’s Miami office has recruited more than a dozen major teams from Merrill Lynch, Morgan Stanley, RBC Wealth Management, Citi Private Bank and HSBC Private Bank. During the 3 quarters ending in June 2016, Bolton has added teams with total AUM of more than $1.3 Billion. The firm has leased additional space at 801 Brickell Avenue to accommodate the growth of its business.
CC-BY-SA-2.0, FlickrPhoto: Roman Lashkin
. Why Investors Overreact to Market Corrections?
The short answer for Bernie Scozzafava, Diversified Fixed Income Portfolio Manager, and Dan Codreanu, Senior Diversified Fixed Income Quantitative Analyst at Eaton Vance, is that it’s human nature, irrational though it may be in many cases:
Loss aversion: Behavioral finance tells us that fear trumps greed. In other words, most investors dread losses more than they desire gains.
Recency bias: Recent events trigger hasty decisions, even when such events contradict longer-term trends or investment objectives.
Overreaction bias: Most investors place too much emphasis on negative, sensational news headlines, leading to indiscriminate selling.
Herd behavior: Investors take an “everyone is selling” mentality and follow suit because they fear being the last one to sell.
According to Eaton Vance experts, these all-too human tendencies were exacerbated by the 2008 credit crisis, which left many investors permanently scarred. This debacle, caused by massive losses on subprime loans, sparked the worst market collapse in more than 75 years. Although nearly eight years have passed since then, the carnage still remains fresh in investors’ minds, with many fearing that the next recession and market downturn will be just as bad.
“More often than not, such fears are unfounded. For example, there is growing concern (and press coverage) these days that bank loans to the energy sector could pose a serious threat to the economy and financial system – even though banks generally do not have excessive E&P exposure, are better capitalized and adhere to stricter counterparty risk measures than they did prior to the 2008 crisis”, point out Scozzafava and Codreanu.
Investors with long time horizons are best positioned to tolerate market volatility and earn attractive returns over time, but instead, many behave irrationally and sell during corrections to limit their short-term losses.
“Market volatility and corrections are many investors’ biggest fear. However, we believe a bigger fear should be missing out on the market recoveries that typically follow the corrections. Our research shows that when disciplined, data-driven investing gives way to biased, emotion-driven investing, portfolio performance suffers”, conclude.
“In the end, it happened and Europe will no longer be the same! Contrary to recent market expectations, the “Leave” camp won, leading to increased uncertainty over the future of Europe.” Matteo Germano, Global Head of Multi-Asset Investments at Pioneer Investments writes on his company’s blog.
After the unexpected “Leave” outcome of the U.K. referendum, they see conditions for a risk-off environment in the near-term. However, they believe that Central Banks are ready to act and their immediate focus will be to stabilize the markets and provide liquidity if needed.
Over the medium-term, uncertainties over the future of Europe and Central Banks’ reaction will dominate financial markets. Ultimately, Pioneer believes that the political and monetary policy response will be the major variables to manage an orderly Brexit.
The British vote has a massive impact on the geopolitical equilibrium, as it creates a precedent in the European Union (EU). Britain’s exit could trigger a surge of initiatives similar to the UK referendum. The elections in Spain and the constitutional referendum in Italy will be the next political events to follow to evaluate the strength of these centrifugal forces within Europe.
From a macro perspective, PIoneer believes that the victory of the “Leave” camp could increase the probability of the developed world being trapped in a low growth/low inflation scenario. “Fears and prolonged uncertainty in Europe following the vote could, in fact, hurt confidence and limit economic activity. A smooth management of the transition, which will take years to materialize, will be a key factor to avoid a deeper crisis that could hit the global economy.”
From a market perspective, the short-term impact of the “Leave” vote will result in increased market volatility and a further flight to quality. While over the medium-term, the focus will be on the political and monetary response.
Ken Taubes, Head of U.S. Investment Management, anticipates a rally in US Treasuries, while there may be a sell off of US high yield assets as well as emerging market assets, particularly driven by a perception that the demand outlook for oil will deteriorate in a risk averse environment. From a macro perspective, the negative economic impact of Brexit on the U.S. should be more limited compared to its impact on the UK and Europe. However, Ken Taubes expects reduced global demand due to a higher level of uncertainty and risk aversion. In his view, while the spillover effects on the US economy are unclear, it is possible that in the event of a significant negative economic impact, the Federal Reserve Board might consider other monetary policy options.
Moving to Europe, Germano and his team believe that the central banks’ immediate focus will be on stabilizing the markets, and to be ready to provide them with liquidity. According to Tanguy Le Saout, Head of European Fixed Income at Pioneer Investments, Brexit will cause a rally in German Bonds, accompanied by an under-performance of other markets, but especially peripheral markets such as Italy and Spain.
A sharp “risk-off” environment, accompanied by widening spreads in peripheral and credit markets could cause Central Banks to intervene. In Tanguy’s view, the monetary policy adjustments will be made, initially through measures of credit easing and broadening of the asset buyback program, but ultimately rate cuts may be implemented. On the currency front, the US dollar (USD) and the Japanese yen could benefit from the “risk-off” environment.
Equity markets are also likely to suffer a period of extreme volatility as investors digest the potential impact of the event. However, the presumed downward pressure on the sterling is likely to be positive for the earnings prospects for certain UK companies, given the predominantly international nature of their businesses. The view of Pioneer’s European Equity team, headed by Diego Franzin, is that the risk-off mode could be mirrored, with domestically focused Eurozone business models (financials for example) most impacted given the unknown ramifications of the decision on the Eurozone economy. In this instance, they suggest that investors consider keeping a cautious stance on the market, focusing on companies with a solid business model, while also being cautious on more domestically focused UK business models.
“From a multi-asset perspective, we prefer to keep a risk-off attitude, favoring “safe haven” assets such as US Treasuries. We believe that holding gold could be a natural hedge should the probability of a secular stagnation rise. We also continue to believe the Swiss franc should be favored versus the sterling, as it tends to behave as a safe haven currency, and we believe the USD could outperform the euro.” Germano concludes.
Hamish Forsyth, CEO at Capital Group for Europe. . "We Look Forward to A World Where It Is Clear The Investor Is Paying for Advice and It Is Not Being Bundled into Our Investment Management Fee"
The heart of what Capital Group has done for 85 years in the US is mutual fund distribution through financial advisors to individual investors and they want to do that in Europe and Asia as well. Hamish Forsyth, Capital Group’s CEO for Europe, explains in this interview with Funds Society his plans for the continent. Always, with a long-term view and being aware of the regulatory and political challenges: “If Brexit was to materialize, with modifications, the management company in Luxembourg could take on the role currently played by London”, he says. But he believes there are opportunities in Europe and Spain, specially for companies stable and conservative as Capital Group.
How do you assess the development of Capital Group in Europe in the last years?
We have been in Europe since 1962 and we have built, particularly through the 1990’s, a meaningful size institutional business; historically our focus has stayed on the institutional market. Since the financial crisis we have been working hard on a plan to develop a mutual fund distribution business. The heart of what Capital Group has done for 85 years in the US is mutual fund distribution through financial advisors to individual investors and we want to do that in Europe and Asia as well. We are physically present now in support to that mutual fund distribution business in London, Zurich, Geneva, Frankfurt, Luxembourg, Milan, Madrid, Hong Kong, Singapore, New York and Miami.
In which markets will Capital Group focus on in 2016 and which are the favorite ones for boosting its business?
This is like with my children, I have no favorite one.
The uncertainty because of elections in Europe and geopolitical risks (Brexit, elections in Spain, rise of populism in Austria): How could it affect to your business development strategy in Europe?
Let´s distinguish between portfolio impact and business planning impact. So, there are lots of things that could affect stock markets, bond prices, and I´m not worried about that so much, I am not a portfolio manager; I leave that to the portfolio managers. For me, as CEO, my focus remains on the factors that could impact our business development strategy. Obviously, Brexit is one of them. We have a strategy throughout the EU that it is based on our UK company and our ability to passport our services from the UK. And if the UK leaves, we presumably will have to find another way of doing that. We have a small management company in Luxembourg today that takes care about our funds (domiciled in Luxembourg) and if Brexit was to materialize, with modifications, that management company could take on the role currently played by London.
Political uncertainty mostly is not affecting our business planning but regulatory uncertainty certainly does. We are in an era of significant regulatory changes and we spend a lot of time thinking about that.
In the case of Spain-Iberia: How are your goals working since the office was opened?
We came to Spain in 2014 to stay. Our goals and measurements of success therefore go beyond AUM and sales objectives. Our initial objective was twofold: firstly, to get to know the local market and distributors needs better and secondly, for us to start introducing CG investment process and capabilities. We trust this approach will help us building a solid, balanced long term business in Spain which is our ultimate goal. 2015 was our first full year in Spain and we feel we have progressed well in our efforts to introduce CG in the local market.
How do you see the positioning of international asset managers in Spain? Are there opportunities?
We had a faster than expected progress last year, which was our first full year with the team in Madrid. Since then, we have also hired a dedicated marketing manager for Spain, so the team has grown. Like everybody this year has been harder; it has been a hard year for mutual fund sales across the board in Europe and our challenge continues to be to find really first class organisations we can do long term business with.
Another important thing to stress, is that now Capital Group is known for the right reasons. We are not only just one of the biggest asset managers in the world. Apart from that, we are very different compared to other big asset managers. In this sense, the feedback we are receiving from clients is very good. We received a very warm welcome from Spanish investors. We trust our investment philosophy and our conservative and long term approach fits well with Spanish investors.
We could say we are a slightly old fashioned, rather conservative asset manager. What we have seen over our 85 years is that people who come to know us well appreciate us greatly. We are not a firm which is necessarily going to dazzle you with star products, a star manager or an outstanding short term investment result because this is not what we are looking for. What we are looking for is long term sustainability of good investment results. This is something that people have to come to learn about us and part of Mario and Álvaro’s jobs in the ground. In this context, and given our way of managing money, it’s important that we present the firm and our investment process before we sell our products.
In the last years, many asset managers have entered Spain; do you think that the Spanish market is crowded now? Where is the market niche for Capital Group?
Yes, we think it´s a crowded market. In the short term, inflows in the Spanish market have attracted a lot of new asset managers chasing short term inflows. Our view is more long term oriented. We think there is a long term opportunity for asset managers in the Spanish market and, in particular, for stable, conservative international asset managers like us.
How many products are currently registered in Spain and which are your latest news? And which products will you bring in the near future?
All of our Luxembourg funds, which are about 20 products now, are registered for distribution in Spain. Spain is an important market for us. We are on the process at the moment of bringing to Europe a number of our long standing American mutual funds. This is the heart of our firm, the family funds called American Funds. In October last year we brought a global equity portfolio, the New Perspective Fund launched in 1964. This month we are bringing our oldest mutual fund, The Investment Company of America, a US equity fund with an 82 year track record which launched in 1934. And later this year we are bringing New World Fund, an all country fund looking to get exposure to emerging markets through multinational companies.
We will continue to bring American funds to Europe and they can be an important manifestation of what we were saying earlier about the long term sustainable nature of what we aim to do.
Are you planning to expand your Iberian team in the mid-short term?
As we mentioned early, we have hired recently a new country marketing manager, Teresa García. One of the goals of our local presence is to provide the best service and support we can to our clients and distributors. That´s what drives the size of the team and currently we are happy with the current size of the team.
Many people argue that the environment will become more complicated for asset managers in the forthcoming future, due to the margin compression, the increase in costs, new regulation, and competition from passive products… Which are in your opinion the most important challenges for the AM industry, especially for Europe, in the next years?
The first thing I would say is that I remain rather positive. Regulatory change has often been very helpful for asset managers, and for us as a firm; and the creation of the single European market for mutual funds, the UCITS directive has given international players like us the ability to distribute one fund cross border in many countries, this is an incredible privilege and one we have taken advantage of.
Regulatory changes have resulted on margin compression and lower fees. As a firm, we believe very strongly in the importance of good advice. We think investors have better financial outcomes when they have worked with a good financial advisor but as I said, in a way, we look forward to a world where it is clear the investor is paying for that advice and it is not being bundled into our investment management fee. A world eventually where it is clear who is doing what for what fee is positive for us as a firm.
The most important challenge for us as an active asset manager has to be results. Linking back with something I´ve said earlier, if fees come down, in the end, it makes it easier for us to do a good job of producing investment results after fees.
Some American and Canadian asset managers are coming to Europe and expanding their product ranges with UCITS products, is this a long-lasting trend? Why?
I think it probably is. If you want to expand as an asset manager and you’re based outside the EU, I think expanding in the EU is always going to be an obvious move because of what we said earlier about the size of the client field, and because of the ability to distribute one set of funds across multiple markets in the EU and beyond. The UCITS magnet as a place for people to start is pretty good. We are not part of the UCITS magnet. We arrived to Europe in 1962 and launched our first fund in Luxembourg in 1969, so our commitment to cross boarder distribution of mutual funds in Europe predates UCITS by a couple of decades. However I think this is an explanation for why so many fund managers are arriving now.
You recently hired a new sales person to cover NRC Markets. How are you positioning yourselves?
Regarding NRC regions, indeed we now have a team of two front line sales people, one based in New York and another based in Miami, covering the main NRC territories in the USA. So, we feel now we are one step closer to the market.
Foto: Eureka Hyman. Los inversores institucionales están creciendo sus exposiciones a alternativos
Institutional investors are seeking to allocate more of their capital to alternative strategies in a quest for strong returns in the low-interest-rate environment, according to a new study from BNY Mellon.
The report, Split Decisions: Institutional investment in alternative assets, produced by BNY Mellon in association with FT Remark, found that among the various alternative asset classes, private equity is most favored by institutional clients, accounting for 37% of their exposure, followed by infrastructure (25%), real estate (24%), and hedge funds (14%).
According to the study nearly two-thirds of investor respondents said that alternatives had delivered returns of at least 12% last year, while more than a quarter said the strategies had earned 15% or more.
“Alternatives continue to gain share in portfolios, but institutional investors are becoming more selective about where and how they deploy their capital,” said Frank La Salla, CEO of Alternative Investment Services and Structured Products at BNY Mellon. “As a result, they are demanding greater transparency from their alternative fund managers. This survey reinforces the notion that investors and fund managers alike will need growing levels of support, insight and data to make informed decisions.”
Key findings from the report include:
Thirty-nine percent of respondents say they will increase their allocations to alternative investment types, while just 6% say they will moderately decrease it.
When it comes to private equity investments, 62% of respondents say they will look for lower management fees and 55% say they will request more transparency as they seek to optimize value.
Distressed strategies are the most attractive when it comes to hedge fund allocations, with 68% of investors currently having exposure to them and 58% ranking them as one of the three most attractive strategies for the coming 12 months.
Fee pressure from investors is leading 78% of hedge fund respondents to say that they will consider reducing their management fees over the next 12 months.
Emerging markets, on average, now make up 31% of institutional investors’ alternative allocations. APAC-based investors account for the highest EM share at 54% of their alternative portfolios, followed by investors in EMEA at 29% and the Americas at only 16%.
“The continued growth in alternative allocations will be supported by a steady stream of new products and strategies as fund managers cater to increasing amounts of capital headed toward alternative assets,” said Jamie Lewin, head of product strategy and performance management at BNY Mellon Investment Management. “Innovation and adaptability will be two key differentiators that determine which firms succeed in capturing what’s become an integral part of institutional portfolios.”
In a historic turn of events, the UK voted LEAVE in this Thursday’s referendum. After the result, the pound traded at minimums of over 30 years, and markets worldwide experience a selloff, but that doesn’t mean there are no opportunities to make money in asset management.
“Markets had been expecting a Remain vote, which means that this comes as a nasty surprise,” says Lukas Daalder, Chief Investment Officer of Robeco Asset Allocation. “This will lead to a lot of volatility and uncertainty in the days and weeks ahead, with risk-off pressures at first taking the upper hand.” But more than this short term volatility, once the smoke lifts Robeco expects a medium-term correction of 10% in European stocks and a decline of the pound against the dollar in the order of 15%. For their Asset Allocation team the mandate is to reduce risk and manage volatility looking for stock-specific opportunities.
Which is in line with what Eusebio Diaz Morera from Spanish EDM, whose signature fund has a 27% exposure to British stocks, told Fund Society in Mexico “Brexit volatility is in the markets not in the companies, the conversation in the companies is short and they are not as affected. As long as you stock pick robust companies with high ROE and growth perspectives with a strong leadership, you should be ok.” In the Forex arena, Nestor Quiroz, founder of FFSignal liked the opportunities presented by the Japanese yen which parity saw a 16.6% movement in the first 7 hours.
According to AXA IM “Central banks are ready to inject liquidity – as much as needed in order to prevent any liquidity squeeze in any important market, starting with equities… to some extent, financial markets’ reaction may influence political reactions, in case of acute tensions, on periphery debt, or some key sectors of the economy, such as banks.” They believe that in the short term, economic growth and jobs are unlikely to be affected: “real economies are like super tankers – they are slow to react to political and financial changes. Yet, market and political developments will be critical. As for the former, if well targeted, they will reduce financial market volatility and limit the extent of contagion across countries and thus mitigate the impact on real economies.”
Prime Minister David Cameron has announced he will resign once a new leader is chosen. The next PM will have to ‘deliver the instruction’ given by the popular vote and activate Article 50 of the EU Treaty in order to initiate the two year exit negotiations and deal with a probably “LEAVE the UK” vote from the Scottish, which voted to STAY in the EU. However Amundi believes that “a large chunk of this chapter remains to be written. Neither the governments nor the central banks are helpless during the transition phase. Within the EU, the political response will come through close cooperation to align governments’ positions and obtain an “orderly exit” of the UK from the EU. Until now, EU countries have always managed to benefit from periods of stress to consolidate their institutions.”
For Marcus Brookes, Head of Multi-Manager at Schroders, Japanese equities, Emerging Market equities and gold look like interesting bets, while he expects to stay away from high quality bonds.
Interest rates are at record lows in the euro area, as a result of which investors can feel a great deal of pressure to achieve acceptable yields. This situation shifts their focus back to the countries of Central and Eastern Europe (CEE). “Central and Eastern Europe currently comes with more positive aspects than one might think. There are factors at play that might drive investor attention to this region in the foreseeable future,” says Robert Senz, head of fixed income fund management at Erste Asset Management. The risks are largely of a political nature, as the tensions with Western Europe with respect to migration, the possible Brexit, the Ukraine conflict, and the re-emergence of nationalistic economic policies suggest.
“In the coming years, the gross domestic product in the region is going to experience strong growth at rates significantly above the growth perspectives of the core EU states.” For 2016 analysts expect GDP growth of +3% and above for countries such as Poland, Romania, and Turkey. Hungary and the Czech Republic will be growing at more than +2% this year and in 2017 (source: Bloomberg consensus estimates). Even Greece, after years of crisis, is starting to recover and might show a significant sign of life at +1.6% next year.
On the bond markets investors can expect a yield of 3.5 to 4.5% against a stable political backdrop. With its purchase programme, the ECB contributes to a run on euro government bonds and corporate bonds. But as far as ESPA BOND DANUBIA is concerned, the central bank can only buy 4% of the bond universe. The risk is therefore manageable and is largely restricted to the geopolitical level. The low exchange rates of the local currencies support exports. “The increase in purchase power acts as driving force for domestic consumption”, explains Anton Hauser, senior fund manager of the East European fixed income flagship fund ESPA BOND DANUBIA. The level of debt of the East European countries and companies also support the case for the investment region. In contrast to earlier crises, for example in 1998 and 2008, the debt ratios are now not excessive. Current account and budget deficits in the region are low. Competitiveness is up. In the most recent location ranking by the World Bank, 10 out of 20 East European countries had improved, among them Poland, Russia, and Slovenia.
After the CEE equity markets lost more than 40% of their value post-Lehman in the past five years (in euro terms), a trend reversal has recently become more probable. The stock exchanges benefit from the recovery of the commodity prices, especially the oil price, which has almost doubled since its February low.
Russia: potential in spite of oil and sanctions Russia was most affected by the falling commodity prices, which came on top of the sanctions imposed by the EU and the USA. The GDP of the, surface-area-wise, largest country decreased by 3.7% last year. Even if the Russian economy will not be able to grow yet in 2016, the first indicators have started suggesting a recovery: inflation has fallen from its high of 16.9% (2015) to most recently 7.3%. We expect the central bank in Moscow, which reduced its key-lending rates only last week to 10.5%, to continue cutting rates in the coming months and thus to support economic growth.
Stock exchanges benefit from the comeback of the convergence story The stock exchanges in the area command comparatively attractive valuations. At a price/earnings ratio of 11.3x, the CEE equity markets offer a valuation discount of 25% vis-à-vis the stock exchanges of core Europe. “And although the estimated earnings growth in Eastern Europe is still not convincing, the potential is intact for equity investors”, explains Peter Szopo, head of equity fund management of Erste Asset Management in Vienna. While the indices are dominated by the energy and banking sectors, it is the strong influence of commodities that may have positive repercussions on the market if the commodity markets were to stabilise further and gradually recover. Some of the biggest and most profitable energy and commodity producers in the world are based in Russia. They have benefited a great deal from the depreciation of the country’s currency, i.e. the rouble.
Turkey: young population, young economy At a joint total of 74%, Russia and Turkey command the biggest weighting in the East European equity fund ESPA STOCK EUROPE-EMERGING. The Turkish equity market offers access to a rapidly growing, young economy with one of the best demographic developments in the world. The P/E is currently a low 7x.
Dividend yield clearly above European stock exchanges The relative attractiveness of the East European stock exchanges is also reflected in the dividend yield. East European companies are currently traded at an average dividend yield of more than 4% p.a., i.e. clearly higher than the yields in Europe (3.8%) or on the global emerging markets (2.8%).
Political risks remain in place The stock exchanges in Eastern Europe have not managed to de-couple from the global markets. There are still risks with regard to global growth, the interest rate policy from here on in (especially as far as the rate hikes in the USA are concerned), and the development of the local currencies. Investors will be monitoring the political development in Russia and Ukraine closely. At the end of the year, Russia will be holding parliamentary elections. Turkey and its constitutional amendments will draw a lot of attention. Lastly, there is Greece, where the debt crisis has not been fully overcome and no agreement with the IMF and the EU has been ratified yet. While the possible, albeit not likely, exit of the UK from the Eurozone (Brexit) would not have the same kind of significant effects on the CEE countries that it would have on Ireland, the Netherlands, and Germany, one would have to brace oneself for price spikes and volatility as well as for widening spreads in line with other financial centres, as Szopo points out.
