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06Mar2007
Advance Eastern Europe Interim Investment Commentary
The East European markets have not performed very well since the beginning of 2007. The MSCI EE index is down by 11% YTD. The markets included in the portfolio of Advance Eastern Europe performed better and as seen, the Serbian and Ukrainian indices are up by more than 25%. Considering the declines from the tops achieved earlier this year, 4 out of the 6 markets have lost more than 10%. Only the Serbian and the Croatian stock markets have been fairly stable and are near their highs. The Advance Eastern Europe portfolio performed much better and its NAV declined to a lesser degree for the past week or so.
The full Interim Investment Commentary could be found here
The main reason for the current decline was believed to be the international debacle that started after the plunge of the Chinese market on 27 Feb 2007. Still, it is worth noting that some of the East European markets topped out much earlier which indicates that other, rather internal market forces have been driving the current sell-off – e.g. the Bulgarian index SOFIX topped out on 22 Jan 2007 and since then has remained in a downtrend.
What’s next?
The Asset Manager believes that the Medium Term prospects (for the next 6-9 months) remain favorable for the Russian and Serbian stocks. What we wrote in our previous investment comments from 04 Oct 2006 and 12 Jan 2007 remains intact: the major Russian stocks are traded at a discount to their world wide peers and the Serbian stocks are very well supported by the huge influx of foreign capital in the country (we still view the current state of the Serbian stock market as similar to the one of the Bulgarian and Romanian markets in 2004). Hence, these two markets (Russia and Serbia) remain our top picks with the highest weights in the Advance Eastern Europe portfolio. We still believe the fund’s portfolio will benefit from these markets in the Medium Term.
On the other hand, the Medium Term prospects for the Bulgarian and Romanian shares have weakened significantly. Our previous negative expectations for these markets remain intact, now with a higher degree of confidence. Thus, the decline that we witnessed with these two markets is most likely just the beginning of a prolonged downtrend that is about to last throughout most of the year. Therefore, we will continue to keep the weight of these markets in the fund’s portfolio low and each market will not exceed 7% of the fund’s assets. Regarding the Medium Term prospects for the Ukrainian and Croatian stocks, the odds are better to see further rise this year, which the fundamentals justify. Our confidence however is lower here.
In conclusion, the Asset Manager thinks that the heavy weight of the Russian and Serbian stocks in the fund’s portfolio as described in the investment strategy from 12 Jan 2007 (32.6% and 26.9% respectively) is justified and as a result the Advance Eastern Europe portfolio contains stocks with sound fundamentals that are likely to rise substantially in the Medium and Long Term. In that sense, even if the current pressure on the global markets continues, the Advance Eastern Europe portfolio is likely to perform much better.
In the Short Term (the next several weeks), the downside pressure on the East European markets will most likely continue. It is highly probable that the current decline will end first in Russia (the market can bottom till the end of the month!). However, further decline from the current levels still cannot be ruled out, i.e., the actual low may be close in time but not in price. At the same time, the Serbian market that has remained stable for the past several weeks, will likely correct part of its gains achieved in January and February and a decline of 5-8% of the BELEX 15 index can be expected. As we stated above, the Medium Term prospects for the Bulgarian and Romanian stock are not positive, therefore this explains our Short-Term negative expectations for these markets as well. Considering the views described above, the Asset Manager will likely hold a little higher amount of cash than suggested in the Investment Strategy from 12 Jan 2007 (15.5%). As long as the downside risk on the international markets remains relatively high, the weight of cash in the fund’s portfolio may rise to 25-30% in the next few weeks.
