Performance Review 2007
Peter Elam Hakansson: "The year 2007 may well go down in recent history as the year of the ”decoupling,” i.e. the previously unthinkable split of the American economy from the rest of the world. Previously, it was generally considered that the American economy generally determined developments in other countries. In 2007, this view was challenged, partly as a result of the American credit crisis and its side-effects. Whether or not this split is wishful thinking remains to be seen. In Latin America and the emerging markets of Asia, total exports to the US make up 40% and 20% respectively, whilst the corresponding figure in Eastern Europe is just 4%. Although growth in our region will tail off slightly, it is expected to remain healthy. We feel that countries with strong, balanced economies will do relatively well when the outlook for the world economy is uncertain. Russia is a good example of this, with an economy that is maybe stronger than ever, with good underlying growth as well as large budget and current account surpluses. Poland is a good example of a growth engine in Central Europe, whilst the developments in countries with greater economic imbalances, such as the Baltics, Bulgaria and Romania, are more dependent on changes in the uncertainties of the world market. Growth in Eastern Europe in 2008 will be slower than in 2007, which comes as no surprise bearing in mind that the growth over the last two years has been the strongest since 1989. Furthermore, some of the economies have exceeded their potential, which has led to economic overheating. The most important driver of growth in Eastern Europe has been, and will remain, domestic demand. There are however, considerable variations within the region and the markets are likely to remain volatile."
Performance Review 2008
Peter Elam Hakansson: "The global credit crisis dominated our Eastern European markets for most of 2008 and the last five months of the year in particular. In the first part of the year, Russia outperformed most developed markets, mainly driven by the continuous increase in the oil price. But the appetite for Russian equities was reduced due to the falling oil price in July, political factors like the conflict in Georgia in early August, and a number of company specific situations. As the global credit crunch intensified in September, the Russian market took a big hit and forced selling by highly leveraged local investors exacerbated the downfall. Large injections of capital by the Russian central bank into the system did not succeed in stopping the dramatic fall. For Eastern European markets in general, the sell-off triggered by the increasing risk aversion by international investors have led to liquidity problems and sharply decreasing valuations. Several of these countries also have economic imbalances and the way these will be handled is very important going forward."
Performance Review 2009
Peter Elam Hakansson: "2009 started with a lot of uncertainty after one of the most serious financial crises in modern history. The year did however end on a much more positive note. During 2009, most countries in Eastern Europe recorded almost unprecedented economic contractions and, at the same time, we saw very strong recoveries on the equity markets. Eastern Europe has been amongst the strongest-performing markets and some countries have even shown performance figures over or around 100%. Considering these incredible increases in share prices, it is easy to forget that there is still a long way to go until we are back at pre-crisis levels. For example, the Russian market (RTS), which gained an amazing 128% in USD terms during 2009, is still about 40% lower than the pre-crisis levels, and valuations remain attractive. During the year, we saw global investors coming back to emerging markets again, but the inflows to global emerging markets funds of about USD 80bn went mainly to Asia and Latin America. Although the inflows to Russia and Eastern Europe recovered at the end of 2009, they were still limited."
Performance Review 2010
Performance since 2007
Peter Elam Hakansson: "Overall this period has been defined by market extremes and high volatility. Markets have fluctuated wildly both on the downside and on the upside. During these times of market stress or indulgence we have never wavered from our investment philosophy and principles despite facing significant challenges.
Based on our core principles of a fully invested and diversified portfolio, local presence and know-how, as well as adhering to key investment themes we have continued to deliver excellent performance for our investors over 1, 3 and 5 year periods. We firmly believe our investment philosophy and approach is well placed to continue our fine track record over the coming years."
Investment Process and Strategy – How does the Fund Manager Invest?
Peter Elam Hakansson: "East Capital is an active manager, combining stock picking with a thematic top down approach. The investment team strives to buy undervalued stocks, combining value with growth. We are fundamental and almost old-fashioned in our views, seeking to buy stocks with low P/E ratios and high dividend yields or otherwise robust values in assets. While selecting securities, the investment team always looks for triggers that can lead to stock price revaluation. The investment team spends a significant portion of their time in Eastern Europe, meeting with companies and their management. We consider this to be essential to interpret financial reports with an additional dimension of information and to be able to correctly assess a company’s abilities to manage different and continuously changing situations which often occur in an emerging market. Since brokerage research is limited - both in terms of coverage and quality -, we know that first hand information also enables us to identify investment opportunities unknown to mainstream investors and invest ahead of the curve. The deeper knowledge of portfolio companies and a high portfolio diversification help to minimise company-specific risks. The fund is not managed against any benchmark.
On behalf of the unit-holders, the objectives of the East Capital European Fund are to generate financial exposure to the economic development of Eastern Europe and to maximise long-term risk adjusted returns."
Investment Outlook
Peter Elam Hakansson: "Growth is resuming in Central & Eastern Europe. It is not yet back to its full potential, but many countries in the region, among them Russia and Poland, will grow around 4% in 2011, which is more than twice as fast as Western Europe. Turkey, Ukraine and Kazakhstan may surprise on the upside and grow more than 5%, while the recovery is slower in Southeastern Europe, where growth will stay around 2%. Inflation and interest rates will be at record lows, which will spur rapid credit growth to unleveraged households in countries like Turkey, but also in Russia.
The risks are primarily external and related to debt and fiscal management in developed economies. The fragilities in the system could dry up liquidity and reduce risk appetite globally. Economies with large external obligations and no external cushions (IMF program or Eurozone membership) or internal cushions (fx reserves) are most at risk.
Russia is our top bet for 2011, on the back of very attractive valuations, strong eps growth, and solid macro fundamentals. News related to WTO entry, privatisation and the forthcoming elections could surprise the market positively as expectations are low on those fronts. The Turkish market remains more vulnerable to external circumstances, and faces some domestic political noise in 1H 2011. If the elections go smoothly and Turkey receives the much-anticipated investment grade, the outlook for 2H 2011 is quite positive however, as the macro fundamentals remain good and the banking sector is strong. The short-term growth prospects in Southeastern Europe are not too exciting, but the fact that these economies are recovering and are cleaning up their public and private balance sheets should eventually bring foreign investors back. The medium to long-term convergence process remains in place and we have already noted how long-term strategic investors are returning.
The fundamentals remain solid in Central Europe, with the exception of Hungary, but the region is unlikely to surprise on either side. Any problems in the Eurozone, which we do expect to surface, will be most felt in the closely-integrated economies of Central Europe. The economic recovery will remain strong in Ukraine and Kazakhstan, driven by a gradual resumption of domestic demand and high commodity prices."
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