East Capital Balkans

In the first quarter of 2025, the East Capital Balkans Fund delivered a return of 8.7%, reflecting the fund’s strategic focus on high-quality, undervalued companies across the Balkan region. The fund’s strong performance was driven by strong stock selection and timely portfolio adjustments, with key contributions from Slovenia (+19.2%), Greece (+20.7%), and Romania (+10.6%), though Türkiye (-7.3%) weighed on overall returns due to domestic political shocks.

The Balkan region’s sentiment in Q1 2025 was buoyed by a mix of optimism and uncertainty on the global trade outlook. Prospects of a ceasefire or peace deal in Ukraine lifted Eastern European markets, as reduced geopolitical risk spurred hopes of regional stability and economic recovery. Meanwhile, Germany’s stimulus measures added a tailwind to Eurozone and Eastern European GDP growth forecasts, with spillovers supporting manufacturing-heavy economies like Romania. However, Türkiye diverged from this trend, underscoring its increasingly domestically driven narrative.

Türkiye’s market lost 10% in Q1, a rare divergence from the Eastern European rally tied to Ukraine peace hopes, reinforcing how domestically focused its dynamics have become. The quarter was marked by heightened volatility following the arrest of a prominent Turkish opposition leader, which triggered a sharp 17% drop in stocks in lira terms, before a stabilisation back to near November 2024 levels. This political shock raised risks to Türkiye’s economic recovery, threatening its disinflationary path and delaying anticipated rate cuts. The lira, while vulnerable, is in a stronger position than during past crises—central bank reserves are significantly more robust than in 2018, and the current account deficit is narrower. The central bank’s proactive measures, including hiking the overnight rate and closing the weekly funding window (effectively a temporary policy rate increase), helped stabilise the currency and signal policy effectiveness. As we met the head of the Turkish Central Bank and the finance minister Simsek in London in January, it was good to see that the strong commitment to the policy normalisation measures was confirmed by actions amid a time of political pressure.

Despite these efforts, recent lira volatility has spooked some fixed-income and equity investors. We now expect the central bank to miss its year-end inflation targets, with rate cuts likely pushed further out. That said, a deeper economic slowdown could emerge, driven by lower consumer confidence and companies’ willingness to invest, potentially accelerating rate cuts in the second half of 2025. Earnings outlooks are highly uncertain, and while modest rebounds are possible, a strong recovery to prior highs seems unlikely in the near term. Top performers included Enka (+5.5%), a construction company with expertise in large power generation projects likely to participate in Ukrainian reconstruction, Logo Yazilim (-2%), a resilient SaaS compounding company, and Do&Co (0.7%), an airline catering company listed in Austria. Though more consumer-exposed holdings, like Bim (-18.7%), faced pressure from weaker sentiment. Our defensive positioning in Turkish bonds of about 11% at the beginning of the quarter also contributed to the relative return, as these short-term fixed income instruments had much more stable returns of 0.4% to -1.4%, still offering a return of circa USD 20% on an annual basis. Though seldom used in the fund, the investment team now views fixed-income securities as an appealing choice due to heightened risks in Turkish equity markets in terms of risk adjusted returns.

Greek holdings returned an impressive 20.7%, driven by macroeconomic tailwinds and standout performers like Alpha Bank (+41.7%) and National Bank of Greece (+29%). The country benefitted from continued economic improvement, with tourism revenues sustaining GDP growth and unemployment dipping further. German stimulus lifted regional GDP, and rising defence spending boosting defence-related industrials like our Greek holding Theon International, surging 97.4% on both widespread expansion and potential backlog growth. Titan Cement (+10.7%) added to gains as its US listing plans progressed, while Optima Bank (+25.9%) capitalised on index inclusions and strong results, with net interest income and loans in Q4 2025 growing 13% and 49% YoY respectively, and 2024 ROTE of 25.1%. They will probably be the only Greek banks with EPS growth in 2025 due to strong loan growth. Greek banks remained a bright spot, offering high shareholder remuneration yields (8% projected for 2025) and discounted valuations (ca 30% below Italian/Spanish peers), positioning them well as European stimulus supports regional investment flows. Negative sentiment from 2024’s European political uncertainty has largely dissipated, reinforcing Greece’s turnaround narrative.

Romania posted a solid +10.6% return, underpinned by Banca Transilvania (+10%) and Med Life (+14.4%), despite political uncertainty lingering from late 2024’s chaotic elections. The centrist government, now being formed, is expected to prioritise fiscal consolidation (targeting a deficit reduction from 9% in 2024 to 3% of GDP by 2030) and maximise EU fund absorption, bolstering long-term growth. Med Life’s growth in the underpenetrated healthcare sector remains a highlight, with 26% 4Q 2024 and high-teens revenue increases expected in the future. Romania’s convergence to European standards continues, though manufacturing ties to Germany’s automotive chain face risks from potential Trump-era tariffs. German stimulus, however, offers a counterbalance, supporting GDP forecasts.

The East Capital Balkans fund’s 9.27% return in the first quarter reflects our ability to navigate a complex landscape, delivering value through active management. Looking ahead, we are optimistic about key 2025 developments: a potential Ukraine peace deal enhancing Eastern European stability, German stimulus lifting regional GDP, and rising defence spending boosting defence-related industrials. Despite Türkiye’s challenges, the fund trades at an attractive 7.8x P/E for 2025, with a 4.4% dividend yield, offering compelling growth potential amid cheap valuations and resilient balance sheets. On the other hand, we see potentially increased volatility due to the US tariffs being implemented around the world. While the potential direct negative impact on the region seems to be limited, we are waiting for more details and the response from countries in our regions to assess the full impact. We remain committed to uncovering high-quality opportunities across this dynamic region.

Performance in USD net of fees.

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