Blogginlägg med etiketten East Capital Summit

"As investors in Russia and Eastern Europe, it's extremely important to understand the natural resource sector and the Chinese market is a very important part of that; we are also seeing more and more trade between Russia and China; and finally, the Chinese market itself is very exciting market and we see so much happening, the market is very worth looking at itself," Peter Elam Hakansson, chairman and founding partner of East Capital, explained the decision to acquire 100% of AGI. 

Gustav Rhenman, fund manager of AGI, laid out the opportunities that attracted East Capital to invest in this expansion: China has had an average annual growth rate of about 10% over past 30 years. If it maintains a 9% growth rate and the US a 3% growth rate over the next 10 years, its economy will be roughly same size as the US. Its industries are growing into the largest in the world – its car industry has already overtaken Japan's to become the largest and by 2020 is forecast to produce 40m cars; by 2020 it will dominate telecoms infrastructure. "Consumption is growing at 15-20% per year – that creates a fantastic framework for industries to grow in," said Rhenman.

By 2020, the Chinese equity markets could be the largest in the world; currently, Chinese stock markets account for 14% of global market cap, compared with Europe 25% and North America 35%.

CEZ
Barbara Seidlova, head of investors relations at power utilities company CEZ, said the Czech company has decided to focus on EU candidate countries rather than in the less developed but higher growth markets of Russia and Ukraine. "The regulatory environment is difficult to operate in and the size of assets are a problem in those countries, so we have decided to focus rather on EU candidate countries," she said, adding that the continent is heading towards becoming one whole electricity market operating on the same grid.

Immofinanz
Eduard Zehetner, CEO and CFO of Austrian property investor Immofinanz, called the property market in Russia "drastically undervalued", where yields at shopping centres stand at 12.5% compared with Poland where they are 6.5%. "You cannot argue 600 basis points between Moscow and Katowice is right, the valuation gap will close," he said.

Regarding Immofinanz, which is only now emerging from a near-bankrupt situation in the aftermath of the crisis, Zehetner said the current share price of his firm, around 80 cents, is well up from the low of 25 cents, but is still some way below the net asset value. "The share price means that the Western Europe part of the business trades at the NAV, while you get the CEE business virtually for free at the current price."

Central European Media Enterprises
Central European Media Enterprises (CME) Petr Dvorak, senior vice president of broadcasting, said there is still a huge level of growth in the advertising market in the six emerging European countries in which it operates, where there are far better prospects than those markets further west.

Using figures to illustrate his point, he said total ad spend per capita in Western Europe is $248 but only $44 in CME's markets. "If you're a car maker or a manufacturer of consumer goods, it's much cheaper to do an ad here than in Germany and the growth potential is pretty high."

Regarding M&A opportunities, Dvorak said CME would certainly be interested if it could find an acquisition like the one it completed in Bulgaria, where it bought the number one player for about $400m.

In the eyes of some international financial institutions, the Czechs have already graduated from the emerging class; it is no longer a country of operation for the EBRD, the development bank focusing on the region, and is not to be found among the emerging economies in the IMF statistics but rather among the advanced economies. Regarding its geographical place, Prague is actually situated west of Stockholm and talking about the Czech Republic as an Eastern European country can be a non-starter when talking to Czechs. 

So, how should we define the Czech Republic? It is not quite Western European and perhaps not a fully-fledged market economy yet. It is certainly Central European in terms of geography and atmosphere and it may be described as one of the most emerged out of the emerging markets in Europe.

From yesterday when I spoke at the summit in Prague.		View of Prague.

10 years ago, Russia was still emerging from a financial crisis, a debt default and devaluation of the Ruble, but is today sitting on the world’s third largest foreign currency reserves, the state and indeed the average Russian is debt free, and the country's output of natural resources that the emerging world so desperately needs to fuel their economies is near an all-time high. 

Even so, the Russian market is trading on a price/earnings (PE) ratio of 7x, little changed from the 6x it was trading 10 years ago. Compare that with the other so-called Bric nations: the Brazil market, for example, is trading on a PE of 14x, yet its economy is just as dependent on commodities and its population is a lot less well educated and wealthy than in Russia. 

"Valuations today in Russia are the same as 10 years ago and many Eastern European markets have not really recovered from the crisis," said Peter Elam Hakansson, Chairman and Head of Portfolio Management at East Capital. "You do have to factor in the risk and volatility factor, but we think it's exaggerated right now." 

Jacob Grapengiesser, a partner of East Capital, said the dichotomy between what is happening on the ground and the perception in the minds of foreign investors marks a wide divide which will eventually be closed. And when sentiment reaches such a trend turning point, that's when the biggest gains can be made.

A sign of how that turning point might have been reached is when one looks over the past six months, the stories about Russia have definitely taken on a more positive tone. An example would be the way Russia behaved and was perceived to have behaved during the tragedy of the late Polish president's plane crash.

"The risk premiums are overstated and the market is too cheap," Grapengiesser said. "In our minds, the markets are misunderstood and risks are oversold."

East Capital’s funds have already benefited from the turning in sentiment toward the region over the decade leading up to the global economic crisis. Its Russian Fund returned 1,565% over the decade 2000-2009, the best-performing onshore regulated fund out of the roughly 94,000 other funds the average investor could have put his or her money in. Its nearest competitor returned 1,380%. Over the period, the Russian stock market was up about 780%, while an investor in the US market would have lost 26% and 5% in the European market. Elam Hakansson says, paradoxically, 2009 proved to be an excellent year for performance – its broad-based Eastern European fund outperformed the index by 23% - which is a function of East Capital's philosophy of hands-on investing rather than investing from afar. In 2009, the firm doubled the number of its local company visits. "We want to be out there seeing things for ourselves, not sitting in our offices."

One main reason why Russia and the rest of the region should be revalued is that in macro terms, overall the CEE region came out of the crisis in much better shape than Western Europe, which is heavily burdened by debt. While Russia may not match the 7-8% growth of past years, the 4-5% expected over the next few years is still considerably more than expected in Western Europe and the US.

Comparing Russia with Brazil again, Petrobras is currently carrying out a capital increase that values its oil in the ground at $8 per barrel; for Russian oil firms, it's $2.50. Not to mention of course that Petrobras' oil comes from  hard-to-get-at deepwater areas, while much of Russia's oil reserves being developed are found onshore.

"Lukoil, a well run private Russian oil firm is trading at a PE ratio of 5x, a third of that of Petrobras, and there's no good reason for that," Grapengiesser said.

As such, East Capital is predicting a shift in investment from Brazil to Russia.

Given Russia's prominence in the region, the negativity clouding investor sentiment inevitably has a spill-over effect into the other smaller markets in the region. Take Serbia, a country whose economy was marginally down last year: it is expected to grow this year, is attracting large amounts of foreign direct investment, yet its stock market is still down over 80% from its peak before the crisis. "Polish banks are trading at 2x book value, while Serbian banks are at just 0.3x book value and Russian banks 1.5x book value," Grapengiesser noted. "Serbia will get there eventually, whether in six months, one year or three years, but the trend is there."