Tuesday 31st May 2016
NEWS TICKER, FRIDAY MAY 27TH: BGEO Group plc, the London listed holding company of JSC Bank of Georgia, has this morning announced that Bank of Georgia, Georgia’s leading bank, and the European Bank for Reconstruction and Development (EBRD) have signed a GEL220m (approximately £70m) loan agreement with a maturity of five years. EBRD obtained the local currency funds through a private placement of GEL-dominated bonds arranged by Galt &Taggart, a wholly owned subsidiary of BGEO. This is the largest and the longest maturity local currency loan granted to a Georgian bank, which will allow Bank of Georgia to issue longer-term local currency loans, providing essential support for micro, small and medium sized enterprises to converge to DCFTA requirements, as well as underserved women entrepreneurs. “We are keen to develop financial products and lending practices, to service specifically women-led SMEs, which will ultimately increase their involvement in developing Georgia’s private sector”, says Irakli Gilauri, CEO of BGEO Group - The UK’s CBI has responded to analysis from the Treasury showing that a vote to leave the European Union could negatively impact UK pensions. Rain Newton-Smith, CBI Economics Director, says that: “All pension schemes benefit when funds can be invested across a stable, growing economy, to best support people in their retirement years. Any financial market turmoil caused by a Brexit is likely to have a negative effect on household wealth, the value of funds and damage pensions here at home, especially for those looking to retire within the next few years. The sheer weight of credible evidence points towards a serious economic shock if the UK were to leave the EU, meaning a hit to the value of our private pensions, jobs and prosperity.” - EPFR Global reports that Nine weeks into the second quarter mutual fund investors remain underwhelmed by their choices as they seek to navigate a global economy characterized by political uncertainty in Europe, lacklustre corporate profits and the prospect of another interest rate hike in the US, economic stress in major emerging markets and Japan's experiment with negative interest rates. During the week ending May 25 all nine of the major EPFR Global-tracked Emerging and Developed Markets Equity Fund groups posted outflows, as did Global, High Yield, Asia-Pacific and Emerging Markets Bond Funds, seven of the 11 major Sector Fund groups and three out of every five Country Equity Fund groups. Alternative Funds look to have taken in over $1bn for the fifth time in the past 14 weeks. Overall, EPFR Global-tracked Bond Funds added $2.6 billion to their year-to-date tally while another $9.1bn flowed out of Equity Funds. Some $12bn was absorbed by Money Market Funds with US funds attracting the bulk of the fresh money. EPFR Global-tracked Emerging Markets Equity Funds remained under pressure from many directions. China's economic data and policy shifts continue to paint a mixed picture for growth in the world's second largest economy, the US Federal Reserve is talking up the prospects of a second rate hike this summer, Europe's recovery appears to be running out of stream and the recent recovery in commodities prices is being viewed with scepticism in many quarters. All four of the major groups recorded outflows during the week ending May 25, with the diversified Global Emerging Markets (GEM) Equity Funds seeing the biggest outflows in cash terms and EMEA Equity Funds in flows as a percentage of AUM terms. Latin America Equity Funds extended their longest outflow streak since late 3Q15 as investors who bought into the prospect of political and economic change in Brazil confront the messy reality. However, year to date Brazil has been the top emerging market for all EPFR Global-tracked Equity Funds as managers bet that the impeachment proceedings against President Dilma Rousseff will open the door to more centrist economic policymaking says the funds data maven. Among the EMEA markets, the firm reports that GEM managers are showing more optimism than investors. EMEA Equity Funds have now posted outflows for five straight weeks and investors have pulled over $300m out of Russia and South Africa Equity Funds so far this month, though GEM allocations for both South Africa and Russia climbed coming into this month. The latest allocations data indicates less optimism about China despite is still impressive official numbers - annual GDP was running at 6.7% in 1Q16 - and the edge the recent slide in the renminbi should give Chinese exporters. GDP growth in Emerging Asia's second largest market, India, is even higher. Elsewhere, India Equity Funds have struggled to attract fresh money as investors wait to for domestic business investment and the government's reform agenda to kick into higher gears says EPFR Global – According to New Zealand press reports, stock exchange operator, NZX, will initiate confidential enquiries into listed companies that experience large, unexplained share price movements, to determine whether they may be holding undisclosed "material" information even while remaining in compliance with the market's Listing Rules that require disclosure of material information at certain trigger points. In an announcement this morning, NZX also warned investors not to assume that a listed entity's Listing Rules compliance statements meant they did not have material information in their possession which would potentially require eventual disclosure - Asian stocks were modestly higher today, largely on the back of increasingly softening sentiment from the US Federal Reserve. Most people think there will be one rate hike this year, but likely it will be in July rather than June. Either way, it will be one and not two or three. Fed chair Janet Yellen is scheduled to talk about interest rates at an event at Harvard University today and the expectation is that a softer approach for the rest of this year will be writ large; a good signal of intent will follow today’s quarterly growth stats. The presidential election will encourage caution; continued market volatility will encourage caution and mixed manufacturing data will encourage caution. Japan’s benchmark Nikkei 225 index added 0.4% to touch 16,834.84 and Hong Kong’s Hang Seng rose 0.9% to 20,576.52. The Shanghai Composite Index gained 0.3% to 2,829.67. The Straits Times Index (STI) ended 6.65 points or 0.24% higher to 2773.31, taking the year-to-date performance to -3.80%. The top active stocks today were SingTel, which gained 1.05%, DBS, which gained 0.07%, UOB, which gained0.11%, Keppel Corp, which gained2.47% and Ascendas REIT, which closed unchanged. The FTSE ST Mid Cap Index gained 0.27%, while the FTSE ST Small Cap Index rose 0.30% - The European Bank for Reconstruction and Development (EBRD) says it is taking the first step towards developing a green financial system in Kazakhstan in partnership with the Astana International Financial Centre (AIFC) Authority. EBRD President Sir Suma Chakrabarti and AIFC Governor Kairat Kelimbetov signed an agreement today on the sidelines of the Foreign Investors Council’s plenary session to commission a scoping study for the development of a green financing system in Kazakhstan. The study, scheduled to be completed in 2017, will assess the demand for green investments, identify gaps in current regulations, and make recommendations for the introduction of green financing standards and for the development of the green bonds market and carbon market services. The development of a green financing system would be consistent with the COP21 Paris Agreement, aligning financing flows with a pathway towards low greenhouse gas emissions and climate resilient development. The AIFC Authority was put in place earlier this year and is tasked with developing an international financial centre in Astana. In March, the AIFC Authority, TheCityUK and the EBRD signed a Memorandum of Understanding to support the establishment of the financial centre and to encourage and improve opportunities for the financial and related professional services industries – Turkey’s Yuksel has issued notice to holders of $200m senior notes due 2015 (ISIN XS0558618384), and filed with the Luxembourg Stock Exchange, that the company has agreed a term sheet with the ad-hoc committee of noteholders and its advisors to implement a restructuring of the notes and is currently finalising the required scheme documentation with the Committee. Once agreed, the Company will apply to the English High Court for leave to convene a meeting of note creditors to vote on the scheme proposals as soon as reasonably practicable when the High Court reconvenes after vacation in June 2016 - Following the agreement in principle of the May 24th Eurogroup for the release of the next loan tranche to Greece, domestic authorities have intensified their efforts for the completion of all pending issues reports EFG Eurobank in Athens. According to Greece’s Minister of Finance Euclid Tsakalotos, on the fulfilment of all pending issues, €7.5bn will be disbursed in mid-June, of which €1.8bn will be channeled to clear state arrears – This weekend is the second UK May Bank Holiday. FTSE Global Markets will reopen on Tuesday, May 31st at 9.00 am. We wish our readers and clients a sunny, restful, safe and exceedingly happy holiday.

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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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