Eastern European IPO trends

The relative state of Initial Public Offering (IPO) transactions is seen by some analysts as presenting a measure of how well individual markets are performing. Are businesses keen to float on the stock market? Do investors feel confident enough to plunge their own capital into such businesses?

It has not gone unnoticed that IPO levels have dropped significantly in many Eastern European markets in recent months. From the Ukraine to the Czech Republic, it seems like there is a waning appetite for such flotations. What lies behind the trend?

Wider economic uncertainties are certainly not helpful in this context. While investors fret about the future direction of countries and the region as a whole, they may well feel that this is not be best time to invest. Conditions are unlikely to be conducive to strong performance from individual entrepreneurs either. There may be an element here of new businesses struggling to emerge from the shadows.

A global economy means that IPOs aren’t just about local investors, of course. For those examining options on a broad scale, Eastern European transactions may represent too much of a risk right now. Although there’s always that balance between risk and reward, many evidently feel that the scales have been tipped too far in one direction here.

The state of the Russian economy continues to give cause for concern and sanctions are proving limiting, in terms of economic growth. There is also evidence that the impact here is not only limited to Russia: perhaps unsurprisingly, there are knock-on effects for trading partners elsewhere, particularly within Eastern Europe.

At present, equity valuations tend to be low. Some companies will have responded to this situation by looking to delay IPOs, believing that valuations will increase once the current circumstances subside. There are certainly many anxious glances in the direction of the Ukraine at the moment, with senior managers in many businesses hoping to see greater stability in the medium-term.

Could a few large IPOs trigger others to follow suit? The recent flotation of Wizz Air, the Hungarian budget airline, has given some cause for optimism. Could it represent a sign of confidence returning to the markets? It’s probably too early to tell, but there seems little chance of a rapid recovery in IPO levels for the most part.

Consideration also needs to be given to the privatisation process that has been ongoing in some countries. Taking Poland as an obvious example, recent years have seen Polish governments looking to privatise on a large scale. There may simply be little left to privatise, reducing the potential for this as a source of IPOs. The same is true in Romania, where it’s been noted that the sale of assets has certainly reduced in recent months.

What does the future hold? That’s always the question that most investors want to know the answer to. Looking into a crystal ball, it would appear that the most likely answer here is that the uncertainty that surrounds the economies of the region means that there doesn’t seem to be much chance of IPO levels increasing at a significant rate during the course of the coming months. If the Ukraine situation, in particular, starts to settle down, then that may well present cause for economic optimism.

What next for the Russian economy?

It’s incredibly difficult to predict where the Russian economy is likely to head next, so we’re not going to try and add our limited voices to the general chatter that currently surrounds this topic. However, we are happy to collect together the views of analysts (both economic and political) to try and build up a clearer picture of the road ahead.

The credit agencies provide a useful starting point and you may well have noted that Moody’s decided to downgrade the Russian credit rating last month. The reduction saw a fall to Ba1, which is sometimes known as “junk status” in financial circles. The credit agency made it clear that their decision was related to political uncertainty within the country.

On its own, this might seem like something of a concern. But bearing in mind that S&P recently made the same judgement call and it becomes clear that there is a general view that the future looks pretty bleak. The crisis in Ukraine and the international sanctions that are in place are felt to be having an impact, while the credit agencies continue to suggest that things may yet get worse.

Russian politicians have suggested that the credit agencies are unnecessarily pessimistic, with the Finance Minister pointing out his own view that the situation is nowhere near as bad as Moody’s are suggesting. It’s also noted, however, that Russian government ministers have reacted strongly in recent months to the threat of increased sanctions.

Meanwhile, EU leaders have come under some pressure to keep the sanctions in place, in order to try and influence the situation in Ukraine. EU sanctions are due to end this summer, with some European governments apparently keen to see them lifted, in a positive reaction to the ceasefire in Ukraine. It’s clear, however, that there are others within the European Union who remain less convinced about taking such immediate action.

Those sanctions have had a knock-on effect for a number of Eastern European states and there is an acknowledgement that governments in Bulgaria, the Czech Republic and Hungary have mentioned that their own countries are feeling some pain. Many German companies, with close trading links with Russia, are also believed to have been adversely effected by the sanctions that are in place.

The Russian Rouble is currently priced at more than 60 to 1 Dollar, which represents a truly remarkable rise. Just 12 months ago, the exchange rate stood at little more than 35 Roubles to the Dollar. As might be expected, given the circumstances, the inflation rate is also rocketing. The reported annual rate exceeded 16% in February, having stood at less than 7% in April 2014.

Looking at the various pressures on the Russian economy, it seems that analysts are in broad agreement that there is likely to be uncertainty ahead. With high rates of inflation, low oil prices and continuing sanctions, there may not be much light at the end of the tunnel. However, those European nations that are also suffering as the sanctions continue may wish to bring about a change of direction.

Focus on falling oil prices

As we write this article, the price of Brent crude oil has fallen to $54 per barrel. Just a year ago, the price stood at more than $100 per barrel. As recently as November, it stood at in excess of $80 per barrel.

The fall in the price of oil has been dramatic and has caused a number of knock-on effects. As investors, it pays to be aware of these impacts and to look ahead to what may happen in future.

The impact on Russia

There has been considerable focus on the impact of this fall on the Russian economy. There is no doubt that the Russian economy has been hit hard and that this reflects the dependence of that economy on oil exports. Clearly, the falling price of oil is unhelpful to the wider Russian economy.

It is predicted that Russia will enter recession during the course of the year, although it’s noted that policy makers have resisted the temptation to decrease oil supplies. With some estimates suggesting that each dollar fall in the price of a barrel of oil wipes out $2 billion in revenue for the Russian economy, there is no doubt that Russia is feeling a certain amount of pain.

Interest rates have risen, in order to shore up the currency, which will certainly make it more difficult for Russian businesses to raise capital and to be successful.

Shale extractions

The falling oil price is, in part, a reflection of increased levels of extraction in the United States. The use of fracking has seen production levels sore, flooding the market with cheaper oil.

But there is an aspect of this change that causes concern for US producers: fracking is more expensive than traditional forms of oil extraction and there are fears about whether some new entrants to the market can remain profitable as these levels, as the price of oil continues to drop. Some suggest that the OPEC group are happy to allow the oil price to settle at a lower level, in the hope of driving some US fracking operations out of business.

Saudi Arabia

It’s notable that Saudi Arabia, the world’s largest oil producing country, has not taken the step of reducing production. A reduction in Saudi oil production would undoubtedly support the oil price. So why have the Saudi government not reacted in this way?

As mentioned above, they may be playing a longer game here and be looking to apply pressure to US producers.

Back in the UK

There has been some talk of North Sea oil platforms being taken out of operation, simply because oil extraction off the coast of the United Kingdom is relatively expensive. Such decisions will clearly put UK jobs at risk.

Consumers, however, will continue to benefit from lower oil prices in the short-term. Many of the products that are sold in the UK’s shops, for example, are now being produced for less money. The cost of energy and petrol for residential and commercial users has also been dropping. With more money in the pockets of UK residents, as inflation tumbles, it may be that those consumers are in a position to spend, which should benefit some UK businesses.

Are you heavily exposed to businesses that rely on oil prices staying within a particular range? As ever, diversification may be the key. But the reality is that so many businesses and markets are impacted by oil prices that it’s hard to escape the need to look more closely at this issue.

What does the future hold?

Analysts have mixed views, with many predicting that oil prices may yet go lower. Others predict that market forces will almost certainly mean a longer time increase to the sort of relatively stable levels that we’ve become used to during the course of the past few years.

When you look into your own crystal ball, what future do you see for oil prices? Your own investment decisions may well depend upon that particular vision.

Where next for Russia?

It’s been more than four weeks since our last post on the subject of growing uncertainty surrounding Russia and the Ukraine. Has anything become clear since?

In political terms, it seems that significant changes have been made. As was previously the case, it seems to us that this is not the place to ponder politics in great detail. However, what we can say is that there are still further changes to come. Until the situation in the Ukraine settles down, it’s hard to imagine a similar stabilisation within Russia’s financial markets.

The repercussions are likely to continue too: there are clearly implications here for neighbouring states, together with international relations. With accounts being frozen and threats being made from all sides, it seems unlikely that the situation will settle down any time soon.

Are we any further forward as a result? An observation here would be that markets rarely react well to such elements of uncertainty. This doesn’t mean that those investors with an ear to the ground will find it impossible to find value within such markets, but it undoubtedly means that we can expect to see increased levels of caution.

When it comes to our own focus on the approach taken by Nevsky Capital in such circumstances, there’s a desire here to learn from the tactics of professional investors. Many private investors are also likely to be following their lead, seeking to get an insight into what the future is likely to hold.

For Russia, it’s clear that many more changes can be expected. Judging the nature of those changes remains difficult and it may take bravery to step in to some investment opportunities right now. What we can say with real certainty, however, is that financial and political analysts will continue to monitor ongoing events. The next few months and years will undoubtedly provide some interesting news stories.

Volatile Russian markets

The recent headlines being made in the Ukraine are clearly of interest to those who wish to invest in Eastern Europe. It should be noted that this blog is certainly not the place for a discussion on the political merits of decisions that are being taken in that part of the world.

However, the financial ramifications are certainly of importance and it’s right that they should be given due consideration. After all, an understanding of what’s going on could lead to a greater insight on the investment opportunities that may be available.

As has been written elsewhere, one of the knock-on effects of the crisis has been the falling value of many shares on the Moscow stock exchange. Some analysts have attributed such falls to the sanctions that have been announced by a number of Western governments. Again, without looking too closely at the nature of such sanctions, it does seem reasonable to ask whether there is a need to consider the impact here on investors.

The future of the Ukraine

For those who are looking to invest directly in Ukrainian companies, there’s a high degree of uncertainty right now. Few people could claim to have an understanding of how the situation will resolve and what it will mean for businesses that are local to that area. What we do know, however, is that markets and investors rarely like a high degree of uncertainty.

Until the crisis reaches a point of resolution, it seems reasonable to expect that share prices will continue to fluctuate.

The impact on Russia

Much of the focus of the news headlines has understandable been on the people of the region and how their lives might be expected to change. Much analysis has been carried out on the Crimean region, in particular.

But what about the impact on Russia? Tumbling stock markets rarely lead to positive headlines and it might be expected that investors will flee, looking for alternative safe havens.

This undoubtedly provides an interesting situation for fund managers and others with expertise that is region-specific. For the most part, their expertise will mean that they will have been aware of what was brewing, well in advance of this coming to the attention of the wider public here in the UK. What that should mean is that they were already making investment decisions that took into account the amount of risk that was involved.

Conclusions

The biggest losers here, in purely financial terms, are likely to be amateur investors. While professionals may have had advance warning of the looming crisis, it’s to be expected that many amateur investors will have witnessed these events from afar, with a combination of surprise, outright shock and obvious concerns.

This is very much a live situation too. Until events settle down, it’s very difficult to know whether there will be a real long-term impact. For those who are reliant on professional Fund Managers, the hope is that those experts have done their research.

For those who are investing directly in the region, it’s time to look more closely at what’s going on, in order to allow the correct actions to be taken.

 

Nevsky Capital – Eastern European Fund – February 2013

We take a look back at the performance of the Nevsky Capital Eastern European Fund during the course of February 2013. Regular updates of this nature are also available via the official Nevsky Capital website (https://www.nevskycapital.com) and are distributed via a variety of financial publications – both online and offline.

Overview

During February 2013, emerging markets were seen to under-perform global market. This particular region suffered more than most, partly due to the continuing uncertainty surrounding the Euro and oil prices, both of which slipped during the course of the month.

As a result of these conditions, the Fund fell by 3.2% over the month. This still reflects an over-performance of 0.5%, when compared to the peer-group average.

Individual markets

Given the spread of associated investments, the headline figures only tell part of the story. Of the markets that are represented, Turkey saw the best overall performance. When measured in US$ terms, there was a decrease in value of 1.6%.

When examining why Turkey performed more strongly than other markets, a number of factors can be identified:

  • There was a relative improvement in trade data.
  • There were continued portfolio inflows.
  • There were advantages as a result of the declining oil price.

The Fund may be seen as being slightly under-weight within Turkey, but investments in telecommunications and the financial sector have paid results here.

Russia was seen to under-perform, although individual stock picks once again brought benefits. In particular, telecoms holdings offered opportunities within the Russian market.

Financial facts

At present, cash stands at 5%. The total value of the fund is $598.6 million and the annualised rate of growth is 19.3%. The top 10 holdings include Gazprom, Sberbank, Rosneft and Novatek.

Eastern European Fund – November 2012

Looking back on October 2012, there’s a clear impression of a relatively quiet month on the markets. Overall, the fund saw growth of 0.74%, which compared favourably with the peer group average (a fall of 0.49%).

The best performing market was Turkey, where a rise of 10.4% during the course of the month was of benefit to the fund.

At the other end of the spectrum, the performance of the Russian market was disappointing, with a decrease of some 3.4% (in US$ terms). Fortunately, the fund was able to take advantage of strong stock selection within the oil sector.

The announcement that Rosneft (the state-backed company) was buying TNK from BP and its Russian owners, brought welcome news.

Overall, the fund holds 56.7% within Russia, 13.9% within Turkey and 9.9% in Poland. Further holdings are present in Hungary, the Czech Republic and Kazakhstan. A further 9% of the overall allocation is in the form of cash.

Looking at key metrics for the fund, it can be seen that an annualised return of 19% has been produced since the launch of the fund in 2000. The fund has a total size of almost $585 million and almost 36% of holdings are within the Energy sector.

Eastern European Fund Report – October 2012

September was a good month for the region and for the Nevsky Eastern European Fund. This was largely driven by news from the United States, where the Fed made an announcement about open ended QE3.

As a result, the Fund saw growth of 3.8% during September. This compares with a 4.1% rise for the peer group average.

Given the Fed’s actions, the decision was taken to plough more money into Turkey and Russian holdings, resulting in a reduction in the amount of cash being held.

There were some concerns surrounding the poor macro economic fundamentals in Western Europe, particularly with reference to the possibility of these having a knock-on effect elsewhere. Despite this, strong gains were seen in Hungary and Poland.

In fact, both Polish and Hungarian markets rose by 8.5% in US terms during the course of the month. In part, this was helped by the stronger Euro.

With weak economic fundamentals and plenty of liquidity (being provided by Central Banks), the Fund Managers have judged that it is prudent to maintain a relatively high cash balance at this period in time.

Overall, the Fund held 10.4% of the overall value in cash. 57.1% of the Fund represents investments in Russia, with 11.5% in Turkey, 11.1% in Poland and 4.4% in Hungary. The remainder is split evenly between the Czech Republic and Kazakhstan.

Eastern European Fund Report – June 2012

The month of May was horrendous for emerging markets, although the fund was able to out-perform its peers, despite a fall of some 16% during the course of the month.

The falls can largely be explained by a range of poor economic data from various sources. In particular, there are obvious concerns relating to the slowdown of the Chinese economy. Disappointing economic data from the US and the continuing Euro Zone crisis are only adding to an uncertain outlook.

The best performance within the region was in Turkey (representing a fall of 11.9%), with Russia seeing particularly poor returns (with a dramatic fall of 19.4% during the month).

Looking specifically at the Russian market, it’s clear that falling oil prices have made a significant contribution there. The managers at Nevsky Capital have, however, decided not to reduce exposure to the Russian market any further. This is due to the fact that expectations are that the oil price will stabilise.

During the course of the month, exposure was also reduced in Hungary. This leaves the fund holding 18.6% in cash by the end of May.

It’s felt that this cash will not be invested until such point as there is an obvious improvement in global economic outlook and market sentiment.