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EM Europe stars search for new ideas following tough 2018

EM Europe stars search for new ideas following tough 2018

Last year was a harsh time for emerging Europe. Turkey’s currency crisis, Russia’s tumbling rouble and asset-based bank taxes in Romania drove funds investing in the region to negative returns and pushed the sector’s average performance to -11.2%.

Fund managers mainly tried to control losses. Citywire + rated Colin Croft, who runs the Jupiter Emerging European Opportunities fund, said the most important thing was to manage risk and avoid conceding goals.

His fund relatively outperformed the sector’s negative average, returning -7.2% in the 12 months to December 2018.

Some of the bullets he dodged included benchmark staples Russian food retailer Magnit, Greek banks and Folli Follie, the Greek fashion house, all of which were down some 65-75%.

He also sold out of Romanian banks and energy companies at a profit to avoid the unfavourable tax and regulatory changes.

Croft’s largest position was in Russian oil company Lukoil, which returned around 38% in sterling terms despite falling oil prices, as the company improved its shareholder payout policy.

Sector Average  
One year -11.20%
Two years 44.10%
Three years 6.10%

Not wanting to only play defence, Croft also added to his portfolio. One of the new positions was Turkish discount grocer Şok, bought in August and September when it was at the very bottom of the market and sold a few weeks later for over 50% profit.

‘This is a very well-run business with a clean balance sheet, but there were a lot of investors who bought into the IPO [intial public offering] and then left and the shares got battered,’ he said. ‘But it’s a food retailer. And people have to eat.’

The Schroders Emerging Markets Equity fund, run by Citywire AA-rated mangers Rollo Roscow and Mohsin Memon, was another to perform above average, returning -5.3% in the year to December 2018.

Shelter from the storm

Roscow said managing losses was mainly driven by the fund’s long-standing underweight to Turkey and its defensive positioning therein.

‘We managed to largely avoid Turkish banks during the heavy summer sell-off,’ he said. ‘We also managed to move enough money into Russian oil and gas in the second half of 2017 and first half of 2018 to help outperform from a stock selection perspective in a tough year. Russian oil and gas usually is a perennial underweight for funds due to governance concerns.’

The fund is overweight a number of frontier markets due to interesting bottom up opportunities in places such as Kazakhstan, Slovenia, Georgia, Romania and Ukraine.

Fund One year Two years Three years
Schroders Emerging Market Equities -5.30% 72.10% 26.10%
Invesco Emerging Europe Equity -5.60% 64.50% 21.50%
Jupiter Emerging European Opportunities -7.20% 60.90% 8.30%
Pictet Emerging Europe -16.10% 49.60% -6%

For 2019, Roscow is heavily overweight financials, industrials, consumer staples and healthcare, but is underweight energy, materials, communication services and utilities, and holds very little cash due to the opportunities he is finding. 

Nick Mason, the manager of Invesco Emerging Europe Equity, said his fund managed to stay above average due to favourable stock selection. He returned -5.7% against the -11.2% sector average.

Still overweight Russia, Mason singles out Novatek, an independent oil and gas company that last year was successful due to its long-term investment in a liquefied natural gas plant deep in the Arctic Circle. Diamond-mining group Alrosa is another favourite.

For diversification, the fund is also picking stocks in ex-Soviet republics, Greece, Turkey and Israel, where he has recently increased exposure via Bank Leumi.

‘I believe it has a clean balance sheet and is best positioned among its domestic peers to benefit from rising interest rates in Israel,’ he said. 

Unsurprisingly, investor appetite for the region remains subdued. But managers seem to think that with share prices having been hit hard this year, there are attractive opportunities that may lure people back.

‘The sector went through a difficult patch from 2014, but we have now passed the worst of that, and despite all that happened, there have been positive returns among the years,’ said Citywire A-rated Chris Bannon, who runs the Pictet Emerging Europe fund. He had a particularly difficult year, returning -16.1%.

‘We had too much Turkey and not enough Russia,’ he said. ‘Our positioning this year remains roughly unchanged, but we have added to the positions that cost us money.’

His preference in 2019 is for Russian domestic companies. He believes much of the bad news is already reflected in the price and rouble weakness may reverse.

Among other stocks, he holds Globaltrans, a logistics company of railway cargo trading, and online bank Tinkoff.

Bannon is also adding to Turkish positions that he believes have interesting valuations. A recent pick is Tofaş, an automobile company producing Fiat models in Turkey. He says the share price, which has taken a 45% hit in the past year, does not reflect reality. ‘Domestic demand may have collapsed, but they are a euro-earning entity due to exports,’ he added. 

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Related Fund Managers

Christopher Bannon
Christopher Bannon
8/30 in Equity - Emerging Markets Europe (Performance over 3 years) Average Total Return: 42.35%
Mohsin Memon
Mohsin Memon
2/30 in Equity - Emerging Markets Europe (Performance over 3 years) Average Total Return: 61.25%
Rollo Roscow
Rollo Roscow
3/30 in Equity - Emerging Markets Europe (Performance over 3 years) Average Total Return: 61.25%
Colin Croft
Colin Croft
6/30 in Equity - Emerging Markets Europe (Performance over 3 years) Average Total Return: 47.34%
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