Thursday 5th May 2016
NEWS TICKER: CORPORATE REPORTING - Lufthansa Group says is maintaining its full-year earnings forecast for an adjusted EBIT which is “slightly above” the previous year’s €1.8b, after reducing its operating losses for the first quarter, having introduced substantial cost cuts and despite a decline in revenues. The firm’s adjusted EBIT loss for the three months to the end of March fell by more than two-thirds to €53m ($61m). Revenues fell slightly to €6.9bn because of pricing pressures in the group’s passenger airlines, says chief financial officer Simone Menne. Lufthansa’s passenger airline division improved its adjusted EBIT by €244m and that for Austrian Airlines was up by €23m. However, currency effects, however, dragged on the result at Swiss International Air Lines, where adjusted earnings fell by €28m. However, the firm issued a health warning that its forecast does not take into account any negative effects of possible strike actions and that it does not expect that pricing pressures will ease any time soon. Lufthansa Group turned in a net loss of €8m, compared with a €425m profit last year, but stresses that this included a large benefit from transactions relating to US carrier JetBlue Airways. Taking this into account, it says, the first quarter net result equates to an improvement of €70m. - SOVEREIGN DEBT - THE UK’s DMO says the auction of £2.5bn of 1.5% treasury gilt 2026 says bids worth £4.473bn were received for the offer of which £2.125bn was sold to competitive bidders and £374m sold to gilt edged market makers (GEMMs). An additional amount of the Stock totalling up to £375.000 million will be made available to successful bidders for purchase at the non-competitive allotment price, in accordance with the terms of the information memorandum. Higher priced bids came in at £98.566, providing a yield of 1.653% and the lowest accepts was £98.526, providing a yield of £1/656% - CYBER SECURITY - Global Cyber Alliance, an organisation founded by the New York County District Attorney's Office, the City of London Police and the Center for Internet Security, say they will collaborate with M3AAWG to push the security community to more quickly adopt concrete, quantifiable practices that can reduce online threats. The non-profit GCA has joined the Messaging, Malware and Mobile Anti-Abuse Working Group, which develops anti-abuse best practices based on the proven experience of its members, and M3AAWG has become a GCA partner for the technology sector – ASSET MANAGEMENT JOBS - IFM Investors today announced the appointment of Rich Randall as Global Head of Debt Investments. Mr. Randall takes on this senior leadership role from his prior position as Executive Director of Debt Investments, which he had held since joining IFM Investors in 2013. Randall replaces Robin Miller, who will semi-retire from IFM Investors after a 17-year association with the company. Miller will remain with IFM Investors and will transition to the role of Senior Advisor and Chair of Investment Committee within the organisation. In his new role, Randall will manage IFM Investors’ global debt investment teams and maintain the organization’s global debt investment process and relationships with investors. He will also oversee the sourcing of infrastructure debt opportunities internationally. He will continue to be based in IFM Investors’ New York offices and will report directly to CEO Brett Himbury – ACQUISITIONS - Intercontinental Exchange says it has backed off from its counterbid for the London Stock Exchange. In a statement issued by ICE, chief executive Jeffrey Sprecher says LSEG did not provide enough information to make an informed decision on the value of the merger. "Following due diligence on the information made available, ICE determined that there was insufficient engagement to confirm the potential market and shareholder benefits of a strategic combination. Therefore, ICE has confirmed that it has no current intention to make an offer for LSEG – POLITICAL RISK – Global risk analysts Red24 reports that political parties, including the National Movement for the Organisation of the Country (MONOP) and the Fanmi Lavalas party, held a series of demonstrations in Port-au-Prince, yesterday. The action was launched to show support for the Commission to Evaluate Haiti Elections (CIEVE), a body established to verify the 2015 elections. The latest call to action came amid heightened tensions between the aforementioned political parties and former president Michel Martelly's Parti Haitien Tet Kale (PHTK), which launched general strikes against CIEVE on 2 May. Further opposition party-led demonstrations are expected to continue in the near-term due to the indefinite postponement of the country's 24 April run-off election and issues surrounding the evaluation of the 2015 elections – INDEX TRADING – Investors have not yet leant into the wind as a ruff of mixed data discombobulated markets yet again, with a lacklustre Asian trading session. More pertinently perhaps, investor sentiment is hanging in advance of tomorrow’s US labour market report. Peter O’Flanagan ClearTreasury reports that uncertainty around Brexit has impacted business sentiment in the UK and “if we are seeing this filter through into Q2 data there may well be additional downside for UK data until we have a referendum result. That may not be an end to the uncertainty as the “Out” campaign appears to be gathering some momentum. Depending on what poll you look at, it would appear the “uncertain” portion of the polls is narrowing, and while the position is currently still far too close to call by looking at the polls, bookies are still favouring the ‘In’ campaign with a 75% probability of remaining”. In the Asian trading session meantime, Japanese stock indexes fell to three week lows, and in line with sentiment this year, the yen has touched yet another 18-month high against the dollar, no doubt testing the resolve of the central bank not to act, despite stating that the yen is way over-priced. The Nikkei225 was down 3.11% today. The Hang Seng ended down 0.37%, while the Shanghai Composite rose marginally by 0.23%. The ASX All Ordinaries ended 0.17% higher, though the Kospi fell 0.49% and the FTSE Bursa Malaysia dropped 0.75%. The Straits Times Index (STI) ended 0.53 points or 0.02% lower to 2772.54, taking the year-to-date performance to -3.82%. The top active stocks today were SingTel, which gained 0.53%, DBS, which declined 2.22%, OCBC Bank, which declined 1.06%, UOB, which declined 1.04% and Wilmar Intl, with a 0.57% advance. The FTSE ST Mid Cap Index declined 0.27%, while the FTSE ST Small Cap Index rose 0.01%. OIL PRICES RISE - The story today was oil as prices climbed in the Asian session, with the Brent crude price breaking through $45; wildfires in Canada were behind the rise. Wildfires look to be burning out of control in the Alberta oil sands region of Canada, which mines and ships heavy crude to the US. Oil companies there have reduced operations as non-essential employees are evacuated. Moreover, US oil output fell last week by more than 100,000 barrels a day to 8.83m, its lowest level since September 2014, though inventories continue to rise. US benchmark West Texas Intermediate for delivery next month was up $1.19, or 2.7%, at $44.97 while Brent prices for July supply rose 94 cents to $45.56. The price of oil has rallied recently because of the 400,000 bpd cut in US oil output (IEA data), US dollar weakness and Asian demand optimism. The next OPEC meeting scheduled for June 2nd will likely be another watershed, as all recent meetings have been. One beneficiary of the recent rally in oil prices is Russia, where the ruble has appreciated 14% against the US dollar this year. As well, investor sentiment towards Russia risk is highly influenced by the oil price. Year-to-date the dollar-denominated Russia RDX equity index is up 25%, and that compares with a gain of 6% for the MSCI EM Index and 1% for the S&P 500 Index reports Chris Weafer at macro-advisory.com. Weafer says the current oil price also makes the removal of financial sector sanctions less urgent for 2016 and eases both short-term geo-political and economic pressure on the Kremlin and reduces social stability concerns. “Oil should rise by [the end of the decade] but be less important by mid-next decade. Medium-term, an oil price rally to over US$100 per barrel is perfectly feasible due to the combination of steadily rising Asia demand (in particular) and the lack of investment by the oil majors since late 2014. Longer-term, the age of oil, or the importance of oil, may already be over or significantly in decline. The strong growth in alternative energy and the commitments made as part of the Paris Agreement make that a very high probability”. Gold is still seen under pressure this morning, say Swissquote’s Michael van Dulkin and Augustin Eden in their morning note today, which they attribute as usual to “pre Non-Farms trading (or lack thereof). We’re of the opinion, however, that employment is OK in terms of the US economic picture such that while there will be short term volatility around it, there’s little point giving this print much attention. Better to concentrate on US inflation data which, if it starts rising, could boost Gold (an inflation hedge) much more efficiently. There is, after all, a fair amount of concern that current easy US monetary policy could lead to inflation overshooting the 2% target when it does finally pick up.” In focus today, UK Services PMI (flat).

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Eastern European funds face reality Photograph ©Soldeandalusia/ Dreamstime.com, supplied March 2013.

Eastern European funds face reality

Tuesday, 19 March 2013
Eastern European funds face reality The range of investment options available to local and foreign institutional investors across central and Eastern Europe (CEE) is matched by the disparity in performance and development of individual markets. Writing in UniCredit’s CEE report for Q1 2013, the bank’s chief Eastern Europe, Middle East and Africa economist Gillian Edgeworth says the predominant theme across CEE last year was the influx of foreign liquidity via portfolio flows. Part of this inflow was structural in nature, reflecting a shift in asset allocation from developed to developing markets, but the remainder was cyclical as investors searched for yield in the face of record amounts of G7 central bank liquidity. Paul Golden reports. http://www.ftseglobalmarkets.com/media/k2/items/cache/2a9ceb674dd25489978c3ffc90b75279_XL.jpg

The range of investment options available to local and foreign institutional investors across central and Eastern Europe (CEE) is matched by the disparity in performance and development of individual markets. Writing in UniCredit’s CEE report for Q1 2013, the bank’s chief Eastern Europe, Middle East and Africa economist Gillian Edgeworth says the predominant theme across CEE last year was the influx of foreign liquidity via portfolio flows. Part of this inflow was structural in nature, reflecting a shift in asset allocation from developed to developing markets, but the remainder was cyclical as investors searched for yield in the face of record amounts of G7 central bank liquidity. Paul Golden reports.

The danger of viewing central and eastern Europe (CEE) as a homogenous market was highlighted in the aftermath of the global financial crisis, when Poland emerged as the only country in the region whose economy expanded during 2009 while its Baltic neighbours experienced significant falls in GDP. Professor Krzysztof Rybinski of Warsaw’s Vistula University refers to the degree of fiscal easing, the scope of public investment and the degree of cross-border financial leverage available to individual countries to explain this disparity. However, with EU guidelines on public debt levels limiting the scope for fiscal stimulus and investment moving away from large scale construction projects, he warns that no part of region will be immune from the effects of economic turmoil in the European Union in 2013.


Various funds are more than aware of the continuing impact of macro trends on the performance of local funds. Even so, the growing diversity of fund investment strategies is a clear indication of the deepening of the asset management industry across the sub-region.




Schroders manages the ISF Emerging Europe fund, which is mainly invested in Russia, Poland and Turkey but also in Hungary, Slovakia and the Czech Republic. The fund has been in existence since 2000, is in the first quartile for its peer group and is one of the five largest funds in the region at around €500m. Lydia Malakis, the firm’s director for central and Eastern Europe says there are no local restrictions around investment in liquid securities. Many CEE asset managers still tend to focus on their local market, mainly because they can generate strong performance for their clients by staying purely domestic, particularly in the larger markets of Poland, Russia and Turkey.


“They don’t see the need to look outside their own markets for capital growth because these markets are still growing and there is a pool of IPOs and corporate bond issuance yet to come to the market,” she explains.


The sophistication of the CEE institutional investor base varies significantly. For example, Poland has a well-developed pension fund system, whereas Russia pension funds are virtually non-existent. Institutional investors generally identify investment opportunities in the region by doing their own research, analysing economic and company specific data and meeting with finance ministers, central bankers and prominent local businessmen to gain an understanding of local regulations and political dynamics, says Andrey Popel, director Greylock Capital Management.


“CEE offers opportunities for index trackers, pension funds, insurance companies, corporate bonds managers and hedge funds. In the Russian bonds market, for instance, there is a wide selection of liquid investable assets in the sovereign, quasi-sovereign and corporate space, although in some jurisdictions—most notably Hungary, Serbia, Croatia, Georgia and even Ukraine—corporate bond supply is quite limited.”


Despite these limitations, Popel says his firm continues to identify interesting distressed and high yielding opportunities in Kazakhstan, Hungary, Russia and Ukraine. These opportunities are often company or country specific event-driven investments (a hedge fund investment strategy that seeks to exploit pricing inefficiencies that may occur before or after a specific corporate event) and have lower correlation with the broader market.


Dainius Bloze, fund manager at Bank Finasta observes that some international investors choose to rely on publicly available company information and make investments from outside via bourses, while other are brought into the market by investment bankers. “Value investing and strategies that combine tenets of both growth investing and value investing (known as ‘growth at a reasonable price’ or GARP) are employed, but in general there is little discrepancy between strategies in this region compared to developed markets,” he observes. “CEE markets are smaller and less liquid than developed markets so strategies have to be adjusted and generally require more involvement from investment managers, since publicly available information is scarce and imperfect. Russia stands out as a market that is very much event driven and dependent on commodities.”


Stefano PregnolatoStefano Pregnolato, head of portfolio management EMEA at Pioneer Investments.While having local expertise is important, it is also possible to tap into investment opportunities through global asset managers. That is the view of Stefano Pregnolato, head of portfolio management EMEA at Pioneer Investments, whose equity and fixed income products are managed in London and Vienna while its emerging markets analysts leverage portfolio managers and analysts based in the region.


“Foreign investors usually prefer internationally available funds when they invest in CEE, whereas investors from within the region tend to prefer local domiciled products,” he states. “Fixed income strategies are much more popular than equities, but that is not unique to this region. Different interest rate environments and risk levels in each country affect the structure of institutional investor mandates.”


Albin RosengrenAlbin Rosengren, partner East Capital. There are fewer specialised managers focusing on Russia or CEE than on other emerging markets such as China according to Albin Rosengren, partner East Capital, who describes a broad eastern European or in some cases a Russia fund as the most common ways of accessing the market.


“There are around 100 funds that focus on Eastern Europe, very few of which are run by independent specialist asset managers and most of which are based outside the region. In addition there are perhaps 20-30 focusing purely on Russia. Many of these funds belong to banks and are run by smaller and often non-specialised teams.”


There are a few investment houses in Russia and other parts of Eastern Europe, but most assets come from outside the region, he continues, “These assets come mainly from western Europe, although some US endowments have invested and pension funds in Latin America and Middle East sovereign funds are increasingly looking at opportunities in central and Eastern Europe.”


Rosengren points out that some institutional investors have opted for passive alternatives and that ETF exposure to the region has increased. He believes this can be explained at least in part by two years of ‘risk-on-risk-off’ where political decisions and macroeconomic events have almost been more important than the performance of individual companies.


Rosengren reckons that most investors are not overly concerned about falling commodity prices but still want exposure to CEE that is not driven by commodities, which is why his firm launched a Russia domestic fund last year that excludes investments in commodities or companies reliant on exports.


“Central and Eastern Europe is still mostly a general broad strategy equity play, but we are seeing the emergence of some plays on different parts of the economy (such as consumer funds) and there are also a few fixed income funds emerging. However, regionally specialised bond funds have not yet generated a large volume of transactions.”


Rosengren suggests that very narrow country funds have struggled to raise assets compared to wider regional funds. “Turkey was a major theme in 2012 on the back of its credit rating upgrade and better than expected economic development. Growth this year is again looking strong and the market is not expensive.”


Paul SeverinPaul Severin, managing director at Erste Asset Management.Erste Asset Management managing director Paul Severin estimates foreign participation in the Polish bond market has risen above 40% compared to approximately 30% this time last year. “Assets managed by local investors (pension funds, insurance, investment funds) have also grown and local market participants have become much more sophisticated, although local fund managers usually cover only one country. There are also some large domestic players in the shape of real money accounts, banks and hedge funds.”


In general, foreign investors are comparing different countries from a fundamental perspective, analysing structural and cyclical issues and trying to find under- and over-valued markets/securities, he explains. Severin refers to increased interest in local FX bonds (both sovereign and corporate) with the Russian local fixed income market being opened to foreign investors, but adds that private equity is still a very small part of the market.


“Global emerging market funds dominated investments last year and emerging Europe accounts for 10-15% of these portfolios. ETF funds captured flow in 2012. Investors use a wide range of investment strategies, from relative country comparison to single name relative value trades, depending on the asset class and assets under management.”


Miroslav KubenkaMiroslav Kub˘enka, head of equity research at Generali PPF Asset Management.Miroslav Kub˘enka, Generali PPF Asset Management head of equity research says foreign investors account for roughly half of total equities turnover on each of the CE3 (Czech Republic, Poland, Hungary) stock markets but that this includes institutional investors from other CE3 countries who view these three nations as almost a single ‘domestic’ market. “Over the last couple of years, the attractiveness of the CE3 equity market region has been decreasing for outside investors. These countries do not enjoy superior growth compared to Western Europe anymore.”


Generali PPF Asset Management considers low liquidity to be a major drag on foreign institutional investment, adds Kub˘enka. “The Prague stock market is a great example. Its equities turnover last year fell to the lowest level since 2003 and several international banks have already closed their equity trading departments in the city.”


Radomir Jac Radomír Já˘c chief analyst at Generali PPF Asset Management.His colleague and chief analyst Radomír Já˘c says that in contrast, participation of foreign investors in the government bond market has risen over the last three years although they still account for less than 50% of outstanding bonds in the CE3 countries with the majority held by domestic banks and pension funds.


“In Q4 2012 non-residents held just over 46% of all Hungarian government bonds, with domestic banks holding around 30% and pension funds the remainder. In Poland, foreign investors control between one third and half of government bonds, compared to 23% by domestic pension funds, 17% by banks and just over 10% by domestic insurance funds.”


According to Kub˘enka it is relatively easy to identify investment opportunities in central and eastern Europe without going through local fund managers. “Foreign institutional investors can choose from a wide range of local brokers and banks, whose support includes research conducted by local analysts. Also, many international banks cover blue chip firms in the CE3 countries and are able to arrange calls with analysts, investor visits, etc.”


He sees little variance in the investment strategies and objectives of institutional investors located outside CEE and those based within the region. The biggest difference between the two is that CE3 equities represent a significant part of the total equity exposure for domestic institutions.


CEE sovereigns have taken advantage of the liquidity window created by low government bond yields in many developed economies to raise cheap funding to finance post-crisis budget deficits and improve maturity profiles. Ukraine, Hungary and Serbia in particular have significantly increased their reliance on international bond funding and have been able to postpone fiscal and structural adjustments.


Lydia MalakisLydia Malakis, Schroders’ director for central and Eastern Europe.Malakis reckons there are about 60 emerging Europe equity funds and agrees that emerging market debt has received a lot of attention from fixed income funds in recent years. “One notable difference from the rest of Europe is that you have a lot of smaller companies that cannot raise finance through the capital markets, which encourages private equity structures.” Property structures are another non-listed option, although she acknowledges that real estate investment performance in CEE is a “mixed bag”.


According to Malakis, local investors in Turkey have been favouring hedge fund-type absolute return strategies investing in local fixed income, equities and money markets. Closed ended, tax optimised strategies were well received in Poland last year, whereas in Russia there is much interest in FX-type strategies and commodities.


“Local deposit rates are also a factor in terms of what you recommend to clients because they may need to hedge their currency risk,” she adds. “Many of our CEE clients are asking for hedged strategies back into their local currency.”


It is clear that CEE is not a ‘one size fits all’ market when it comes to investor preferences. However, for all the region-specific recommendations and warnings, Rosengren concludes that CEE allocation decisions are based on the same factors as for any other region—growth prospects, risk and valuations.

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