East Capital New Europe

East Capital New Europe gained 8.9% in the third quarter, outperforming the benchmark by 0.9%. Over a three-year rolling horizon, the fund is up 162%, with 36.2% alpha. The top three performing countries were Poland (17.3%) Greece (10.1%) and Kazakhstan (9.1%), while Romania declined by 4.4%. This performance was driven by country allocation, stock selection and selective portfolio changes, which were backed by company meetings, site visits and in-depth research.

Poland remains our largest country allocation, accounting for 37.4% of the portfolio. It is also the country in which we are overweight. The economy continued to grow, with GDP increasing by 3.9% year on year in the second quarter. Inflation reached 3.4% in August, while the National Bank of Poland held its reference rate at 3.75% in September. Although higher energy costs remain a constraint, domestic demand and investment provide a supportive foundation. The European Commission's May forecast projects growth of 3.5% in 2026, with EU-funded investment set to support activity this year before funding absorption moderates.

One important theme that continues to excite us is defence, where we see long-term growth opportunities. During the quarter, we built a new position in CSG. Our visit to its military truck and land warfare systems operations provided us with a closer look at the group’s industrial capabilities. We forecast an earnings CAGR of approximately 34% for the period 2025-27, while the shares are trading at 13.6x 2026 P/E and at a valuation discount of 40-45% compared to peers. Among our other holdings in the sector, Theon offers exposure to the growing demand for night vision and advanced optronics. The company has a forecast earnings CAGR of approximately 40% between 2025 and 2027 and a 2026 P/E ratio of 26.5x. Lubawa adds exposure to military textiles and Poland’s defence investment cycle. It has a forecast earnings CAGR of 15% over 2025-27, with 2026 valuations of 11.6x P/E and 6.6x EV/EBITDA. We remain focused on the long-term earnings opportunity as these businesses convert defence demand into profitable growth.

Some of the fund’s largest gains were delivered by our Polish holdings. PKO Bank Polski returned 23.2%, with an attribution of +12 bps, while Allegro returned 29.2%, with an attribution of +16 bps. Meanwhile, Pekao and LPP returned 21.0% and 31.7% respectively, with an attribution of +10 bps and +14 bps. Banks benefited from solid economic growth and healthy credit demand, with loan volumes growing at double-digit rates year on year. Another important theme was the consumer sector, where real wage growth remained positive and consumption continued to grow by around 3% year on year. Potential pre-election fiscal measures could further boost household spending.

The energy sector became a more significant part of the portfolio during the quarter, increasing from 2.3% to 16.3%.. Alongside an increased position in Orlen, the fund established new positions in Motor Oil, Tüpraş and MOL. Motor Oil returned 32.3%, with an attribution of +52 bps, while MOL returned 31% and Tüpraş returned 26.5%. We are experiencing one of the strongest macroeconomic environments for the sector in years. Persistent geopolitical tensions, underinvestment in supply, energy security priorities and robust refining margins continue to create a highly supportive environment. Although taxation remains a risk, we believe that the strength of the underlying fundamentals will likely outweigh regulatory headwinds over the medium term. Depending on the product, light and middle distillate cracks remained 3-4x higher y/y in August and also increased m/m. For example, Tupras's diesel crack reached USD 84.7/bbl in August, up 13% m/m and 3.2x compared with the same period last year.

For 2026, we expect Tupras to deliver 57% EBITDA growth and 105% earnings growth, while Motor Oil Hellas is expected to deliver 78% growth in both EBITDA and earnings.

Greece was a particular highlight. Our Greek holdings returned 17.7%, with attribution of +144 bps. Meanwhile, Optima Bank returned 40.9%, and Piraeus Bank and Alpha Bank returned 17.1% and 17.6%, respectively. Optima Bank was the largest contributor to attribution at +80 bps. We see further potential for banks to expand lending and customer relationships while maintaining underwriting standards and controlling costs. The Greek economy also retains important sources of resilience. The European Commission's May forecast envisages GDP growth of 1.8% in 2026 and 1.6% in 2027, alongside continued budget surpluses and a declining public debt ratio. EU-funded investment supports the near-term outlook, although higher energy prices are putting pressure on households and the completion of the Recovery and Resilience Facility will slow investment growth. We believe that improving public finances and maintaining investment will boost confidence beyond the current cycle. During the quarter, we increased our allocation to Greece from 16.2% to 21.4% of the fund.

The situation in Hungary was more mixed. OTP Bank fell by 4.2%, with an attribution of -4 bps, but remained a core holding at 9.4% of the portfolio. We observed some profit-taking in the company during this period. We remain optimistic about the Hungarian macroeconomic outlook and consider OTP Bank to be a strong proxy for the country's recovery. On the macro front, the European Commission's May forecast projects GDP growth of 1.8% in 2026 and 2.1% in 2027. During the quarter, the government confirmed the completion of all the required milestones for the release of the previously frozen EU funding of EUR 16.4 billion. The disbursement of funding, a more predictable policy environment and the intention to join the eurozone within a few years should support investment and confidence. While we remain positive about this potential, we recognise that fiscal pressures may limit the pace of tax relief.

Turkey's adjustment process is ongoing and requires patience. Annual inflation eased to 31.5% in August, while the central bank maintained its policy rate at 37% in September. Although GDP grew by 2.3% year on year in the second quarter, the central bank noted a further weakening in domestic demand during the third quarter. Tight financing conditions are weighing on near-term activity, but sustained progress on inflation could eventually create a healthier environment for investment and earnings growth. Turkish equities came under additional pressure in September from a domestic investment fund crisis. After several asset managers were unable to meet redemptions, the Capital Markets Board placed 131 funds into liquidation, and the resulting forced selling pushed the BIST 100 into bear-market territory. Over the period, our Turkish allocation declined from 12.5% to 9.5%. DO & CO returned -12.2%, with an attribution of -38 bps, while MLP Care returned -4.3%, with an attribution of -26 bps. Not having exposure to Akbank, Yapi Kredi and Isbank generated positive attributions of +30 bps, +19 bps and +18 bps respectively. We continue to look for companies that can protect their margins and achieve real earnings growth during this period of adjustment.

Our outlook remains optimistic, albeit selective. We have a clear preference for companies where earnings momentum, valuation and balance-sheet strength are not fully reflected in market expectations. The fund is trading at a P/E of 11.6x, with expected earnings growth of 6% year-on-year and a dividend yield of 5.5% in 2027. Our focus remains on companies with visible earnings revisions, attractive valuation support, strong return profiles and identifiable short-term catalysts. Management access, site visits and proprietary research remain important sources of insight that set us apart, particularly where the consensus underestimates margin potential, capital returns or the pace of balance-sheet improvement. We believe that an end to the Russia-Ukraine conflict would further reduce risk premiums and yields, thereby supporting equities across the region. Meanwhile, longer-term themes such as EU-funded investment, energy security, financial deepening, consumer resilience and corporate self-help continue to create attractive opportunities in Eastern Europe.

Performance in USD net of fees.

The information in this document should not be considered investment advice and should not be used as the sole basis for an investment decision. Please read the Prospectus and the KID, which are available on the fund page. This publication is not directed at you if we are prohibited by any law in any jurisdiction from making this information available to you and is not intended for any use that would be contrary to local laws or regulations. Every effort has been made to ensure the accuracy of the information, but it may be based on unaudited or unverified figures or sources.