Monday 30th March 2015
NEWS TICKER: MONDAY MARCH 30th 2015 : According to LuxCSD several unions in Argentina have called for a strike on tomorrow. It is still not known whether the Central Bank of Argentina, Caja de Valores as Central Depository and/or the Argentine Stock Exchange will adhere to this strike, and of the possible impact on settlement and cash operations. Citi, which is LuxCSD’s custodian, will be keeping the securities depositary updated on developments. LuxCSD says its customers are advised to take into consideration the possibility of disruption and delays in the settlement and cash processes - Capital Intelligence (CI) has affirmed Bahrain's Long-Term Foreign and Local Currency Ratings of 'BBB' and its Short-Term Foreign and Local Currency Ratings of 'A2'. The Outlook for Bahrain's ratings was revised to 'Negative' from 'Stable'.Deterioration in the public finances in view of the country's dependence on declining oil revenues, in addition to continued increase in debt levels. b) Deterioration in current account position in view of the decline in the value of oil exports, which limits the country's shock absorption capacity. Reflecting rising public expenditure and declining international oil prices, the budget deficit is expected to have doubled to 6.8 per cent of GDP in 2014 and is on course to exceed 12 per cent in the coming years, assuming no change in key policies and an average oil price of $50 per barrel in 2015-16. The central government budget structure remains weak in view of the lack of diversification of government revenue (oil accounts for around 88 per cent of central government revenue), and the absence of fiscal consolidation measures in view of the polarised political climate. Spurred by growing deficit, central government debt level continued its increase reaching 47.1 per cent of GDP in 2014, compared to as low as 21.4 per cent of GDP in 2009, while it is expected to top 69.2 per cent of GDP in 2016. Gross financing needs are also expected to increase to a still manageable level of 18.5 per cent of GDP in 2016, compared to 7.5 per cent of GDP in 2013 - French operator Bouygues Telecom says it will roll out one of the first implementations of LoRa low-power WAN technology, designed specifically to support the Internet of Things (IoT) connectivity, in France by June. The underlying technology was developed by French company Cycleo. The purpose of an IoT-specific wireless networking technology is primarily to be as low-power as possible. Many IoT implementations will be industrial, embedded use-cases where replacing power sources is expensive and impractical. Bouygues has been trialling LoRa in Grenoble since 2013 and expects 500 towns and cities to be covered by year end. KPN, Swisscom, Belgacom and Fastnet are also reported to be ready to deploy LoRa networks or carrying out large-scale trials. “The Internet of Things is going to transform entire areas of our economy, says Olivier Roussat, Chairman and CEO of Bouygues Telecom in an official statement - Moody's has today assigned a Baa2 long-term rating to the new hybrid securities issued by Bayer AG. The rating outlook is stable. The rating of Baa2 is two notches below Bayer's A3 senior unsecured rating. This reflects the deeply subordinated ranking of the new hybrid securities in relation to the existing senior unsecured obligations of Bayer or those issued by its subsidiaries and guaranteed by Bayer. The new hybrid securities will be senior to common shares - The Straits Times Index (STI) ended +4.16 points higher or +0.12% to 3454.26, taking the year-to-date performance to +2.65%. The FTSE ST Mid Cap Index gained +0.10% while the FTSE ST Small Cap Index gained +0.03%. The top active stocks were SingTel (-1.13%), UOB (-0.13%), DBS (+0.30%), Global Logistic (+0.76%) and CapitaLand (+1.39%). The outperforming sectors today were represented by the FTSE ST Consumer Goods Index (+0.89%). The two biggest stocks of the FTSE ST Consumer Goods Index are Wilmar International (-0.61%) and Thai Beverage (+3.36%). The underperforming sector was the FTSE ST Telecommunications Index, which declined -1.05% with SingTel’s share price declining -1.13% and StarHub’s share price declining-0.23%. The three most active Exchange Traded Funds (ETFs) by value today were the DBXT S&P/ASX 200 ETF (unchanged), STI ETF (unchanged), DBXT FTSE Vietnam ETF (+1.19%) – The Singapore Exchange (SGX) says that UOB Bullion and Futures Limited (UOBBF) has joined as a trading member of its securities market. Chew Sutat, head of sales and clients, SGX says the membership enables UOBBF to offer “another product class to their regional clients, thus adding to liquidity in the securities market. We also look forward to working with UOBBF to bring their existing derivatives customers to all our markets. As an SGX Securities Trading Member, UOBBF will be able to offer equity trading services to institutional clients, and accredited and expert investors. SGX now has 27 trading members and 26 clearing members - Taking their cue from the positive tone in Wall Street on Friday, major Asian equity markets were firmer today favoured by market expectations for the adoption of further policy stimulus by Chinese authorities to support domestic economic activity. Elsewhere, US Treasuries were modestly firmer in early trade on Monday while the FOMC Chairman’s mildly hawkish remarks assisted the USD to move higher says Eurobank’s mid-morning markets review. According to the bank discussions between Greek authorities and the Brussels Group on a fully-costed list of reforms the Greek side submitted late last week are reportedly expected to continue on Monday for the third consecutive day. Local press reports suggested today that a number of issues still remain open. On the latter, local newswires quoted an unnamed high level euro area official as saying that the Euro Working Group will likely assess Greece’s reform proposals later this week (reportedly on Wednesday) but euro area finance ministers are not expected to convene before all the details are ironed out. Meanwhile, Prime Minister Alexis Tsipras has reportedly requested an extraordinary plenary session to be held today at 8pm Greek time to inform the Hellenic Parliament about the progress of ongoing discussions with the Institutions - Standard & Poor's revised last Friday the outlook on the Republic of Cyprus sovereign credit rating to positive from stable, affirming the country's B+/B long- and short-term foreign and local currency sovereign credit ratings - Nearly two thirds (61%) of small and medium sized companies who are yet to undertake auto enrolment say they would welcome the publication of a definitive list of pension providers that accept all firms - regardless of size - to help them comply with their auto enrolment duties, according to new research* by workplace pensions provider NOW: Pensions. Of the SMEs surveyed who are yet to stage, two thirds (66%) don’t have any existing pension arrangements for their staff while 8% have a stakeholder pension scheme set up but don’t have any members of staff in it. A quarter already offer a scheme to a proportion of their workforce. When it comes to selecting a pension provider for auto enrolment, over a quarter (27%) of those who are yet to stage still say they haven’t given any thought to how they’ll go about finding a pension provider, down from 44% in 2014**. One in ten (12%) are going to search the market and do the research themselves, up from just 4% of those firms surveyed in 2014. When it comes to seeking external advice, over a quarter (26%) intend to get help from their accountant up from 14% in 2014. One in six (16%) intend to rely on their existing provider, down from 22% in 2014. Just 6% plan to speak to a financial adviser up from 5% in 2014. Morten Nilsson, CEO of NOW: Pensions said: “As smaller companies begin to tackle auto enrolment, the number planning on choosing their pension provider without any advice is inevitably going to grow. “This is why The Pensions Regulator’s (TPR) decision earlier this month not to publish a list of pensions schemes that are directly available to any employer, was so disappointing. The reality is these firms urgently need help to find high quality, low cost providers that are willing to accept their business, and the regulator needs to hear their pleas before it is too late.” - Harkand has secured a multi-million pound contract with Maersk Oil North Sea Ltd for the provision of DSV services in the North Sea region. The 12-month contract will be serviced by Harkand’s two DSVs, the Harkand Da Vinci and Harkand Atlantis, supported by project management and engineering from the firm’s Aberdeen office. The contract covers well tie-ins, structure installation, piling, flexible flow line lay, flexible riser installation, pre-commissioning, riser recovery, decommissioning and general inspection, repair and maintenance (IRM) work. Harkand Europe managing director, David Kerr explains, “This contract win is a further acknowledgment, not only of the expertise and capacity we have built up within the region, but also the open culture that we have at Harkand. We look forward to delivering a consistent and cost efficient service to Maersk, which is especially critical in today’s business environment. By utilising both our sister DSVs, we will provide a robust and fully flexible approach to executing both planned and unplanned interventions and we will work closely with Maersk to ensure safe and successful campaigns.” The Harkand DaVinci and Harkand Atlantis are both equipped with state-of-the-art saturation diving systems, 140t active heave compensated cranes and Super Mohawk ROV spreads -Alcatel-Lucent has announced a partnership with China Telecom to roll out the operator’s FDD-LTE services to 40 additional cities across 12 Chinese provinces. The French infrastructure vendor said it is one of three suppliers to have been chosen by the telco, and will provide its LTE mobile ultra-broadband access technology to complete the project.
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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