asset management in cee
TRANSCRIPT
Emerging Europe Investment
Opportunities
2017
Karoll Financial GroupMission
“Our goal is to create accessible vehicles, tools and processes in helping global investors harness the exciting potential of Emerging Europe.”
Stanimir KarolevFounder and Chairman,
Karoll Financial Group
Karoll Financial Group
Karoll Brokerage
Karoll Capital Management
Advance Terrafund
Advance Equity
Karoll Investment
Leader by number of transactions on BSE for 15 years in a row30% market share of of all transactions
Pioneered the first mutual fund in the country (2004)Strategic partner of Schroders for the local markets
Largest farm land REIT in the countryIFC (World Bank) - key stakeholder
First Private Equity fund in Bulgaria
Executed the first IPO in Bulgaria (2004)
25 EXCITING YEARS OF SUCCESS | TEAM OF 200 EXPERTS
Karoll Financial Group Product Offering
Bulgarian Capital Market
International Capital Markets
Brokerage
Wealth Management• Advance Invest• Advance Eastern
Europe• Advance Emerging
Europe Opportunities• Advance Global
Trends• Advance
Conservative Fund• Separately Managed
Accounts
Institutional Mandates• Emerging Europe
Opportunities (Eastern Europe)
• Central Europe• Balkan• Thematic equity• Mixed
Asset Management
IPO & SPO Activities
M&A Restructuring
Investment Banking
Real Estate
ADVANCE TerraFund
REIT
Private Equity
ADVANCE Equity
Holding
Karoll Capital Management OverviewUnique heritage in Emerging Europe
Founded in Sofia in 2003, our roots are truly in Emerging EuropeIndependent and skilled Eastern Europe-based team with long tenurePart of Karoll Financial Group with support of 200 professionals + 70 local offices
Steady business growth on solid reputationAUM ~ USD 250 mln. Assets split in various mutual funds, real estate investment trusts, wealth mgt & mandatesManages 5 UCITS funds and multiple private accounts
Crisp focus on Emerging EuropeHelping clients harness the potential of Emerging EuropeDeep understanding of the cultures and dynamics of our marketsOn-the-ground research coverage of strategically important holdings
Partnership with top international namesLocal representative of Schroder Investment Management, UKPartners with IFC (World Bank), European institutions and global playersCheverny Capital – our Canadian representative
Our Unique Value Proposition“Emerging Europe is a unique investment theme with strong upside potential and low correlation to the developed world. It is a truly overlooked opportunity!
We pick out high-growth sectors in a high-growth region.
We generate alpha in the region while helping global investors overcome local barriers.”
Daniel GanevManaging Director,
Karoll Capital Management
Independent
Flexible
Entrepreneurial
Deep understandin
g of local markets
Karoll Capital’s Investment Committee Seasoned investment team with long tenure and unique combination of skills:Daniel Ganev, MBA, Managing Director
15+ yrs of experience in in fund management, financial products development and marketing, business development in emerging markets
Nadia Nedelcheva, CFA, Head of Portfolio Management 15+ yrs of experience in portfolio management, research, valuations and modeling in
Central & Eastern Europe (CEE)
Alexander Nikolov, Portfolio Manager 18+ yrs of experience in portfolio management, financial analysis, technical analysis on
the US, European and CEE market
Katerina Atanassova, Portfolio Manager 15+ yrs of experience in portfolio management, technical analysis and trading on the
global developed and emerging markets
Georgi Georgiev, Portfolio Manager 13+ yrs of experience in research, fundamental analysis, valuations, portfolio
management and trading in the global emerging markets and USA
Karoll Capital’s Analytical SupportOur Sofia-based analysts have easy access to regional companies in search of investment opportunities:
Dimitrios Latitaris, Investment Analyst 4+ yrs of experience in research, investment
banking, fundamental analysis, valuations in Central & Eastern Europe
Georgi Raykov, Investment Analyst 3+ yrs of experience in research, fundamental
analysis, valuations in Central & Eastern Europe
International Partners and Clients
Karoll Capital’s Investment Process – the 4 S’sScreen
The process starts with our on-the-ground analyst team screening the landscape in search of investment opportunities in Emerging Europe. We apply filters in terms of liquidity (time needed to enter/exit investment), market cap, transparency, corporate governance, etc. As a result, our investment universe comprises around 500 stocks out of some 3 000 listed companies in Central and Eastern Europe. Our major advantage is the freedom to deviate from local indices based on our views. This gives us flexibility in our investment choice, regularly leading to superior results and outperformance of benchmarks and peers. Using proprietary analytical tools and exchange with local contacts, we seek to pinpoint stocks that are trading at a discount or that are in a position to undergo some fundamental change. Examples of such events are turnaround situations, management changes, financial results surprises, etc.
StudyThe generation of investment ideas leads to the next step -- a thorough in-depth analysis conducted in house. Because of market inefficiencies we believe Emerging Europe is abundant with mispriced assets. In estimating the true value of a stock we study the firm’s business model and its ability to realize returns greater than the cost of capital, the shareholder structure and management capabilities, sector dynamics and overall market position. We strive to find companies with improving profitability margins and low debt levels that are traded at a discount to peers. On-site visits and regular contact with company representatives are a key part of research as well. In addition to employing valuation methods, we also consider investor psychology, liquidity and order flows. The outcome of the investment assessment is the analyst proposal to the investment committee, which summarizes the case, the rationale behind it, potential upside and associated triggers, as well as the risks involved.
ShapeKaroll Capital’s 4-member investment committee, supported by our analyst team, examines the selected investment proposals in view of portfolio construction. In the case of managed accounts / mandates the decision is collective. Convening each month, the committee decides on position weight changes and/or liquidations. At each stage, compliance with regulatory guidelines and client-tailored requirements are factored in.
ScrutinizeFinally, the investment portfolio is monitored with all different positions being systematically scrutinized. The investment team applies in-house processes and practices enabling it to adequately react to the different triggers causing distortions to the investment case. As part of the process our analysts and portfolio managers follow up with the companies’ management, screen the sector competitors and general business/political environment. Conducting attribution and risk management analysis on the portfolio holdings is essential. Any resulting concerns related to the investment case prompt reviews of the rationale behind the decision to add / hold/ reduce the stock as a portfolio component.
Our Investment Universe3,000+ listed companies in CEE
Investment Universe – 1,500750500250
Survivors
150
Selection Filters:
Sector Outlook & Company Competitiveness
Mkt cap & Liquidity
Corp Governance & Transparency
Financial Strength
In-house Valuation
Karoll Capital’s Investment Process
In-house valuation Our PMs and analysts use the following valuation methods:- Peers comparison - Discounted cash flows model
Financial strength - Earnings: earnings cyclicality, recurring earnings, forecast sales and earnings - Analyze profitability, Leverage and funding, Debt service, Liquidity, Asset quality
Sector outlook and competitiveness- Identify key growth drivers and themes, assess sustainable competitiveness
Corporate governance and transparency- Study and evaluate board composition, executive remuneration, communication with shareholders, provided access to documents
Market cap and liquidity filter- For more liquid markets: up to 3 days for entry/exit- For less liquid markets: up to 7 days for entry/exit- Free-float > 25%
We aim to achieve sound risk-adjusted performance
We define risk indicators/limits regarding market risk, liquidity risk,
exposure to a single issuer, to less liquid stocks/markets, etc.
Risk management is executed on a day-to-day
basis by portfolio managers who assess risk
at each level of the investment life-cycle investment selection,
portfolio construction and portfolio monitoring
The risk management department supports the investment process by
implementing and monitoring the policy and
procedures for risk identification constantly
monitors risk factors/indicators, performs
contribution analysis and risk assessment
The risk management department prepares a monthly report for the
Board, as well as notifies portfolio managers immediately upon
approaching of critical levels of key risk
indicatorsRisk Management
Investment team meetings
Weekly meetings- PMs and analysts interact and exchange ideas
Monthly meetings
- Portfolio reviews of mutual funds / managed accounts, contribution analysis- Overview of market development -> modify portfolios if necessary
Quarterly meetings- In-depth analysis of investment portfolios- Strategic asset allocation decisions
Ad-hoc meetings- In the event of a trigger from the in-house surveillance system
Karoll Capital Management Investment Capabilities & Results
Main strategies offered to institutional investors: Emerging Europe Opportunities (Eastern Europe), Central Europe, Balkan, Thematic, as well as mixed strategies based on specific mandate
Karoll Capital’s Investment Committee aims to construct for our institutional clients
Individually Managed Accounts / Mandates portfolios designed to take advantage of the L.T. trends as well as hot opportunities in the market
Strategies results vs. benchmarks, as of 31.01.2017 YTD 1 year
3 years, annualized
5 years,annualized Volatility Beta Alpha
MSCI EFM Europe +CIS -0.48% 27.26% -1.72% -4.13% 23.04% MSCI EFM Europe +CIS ex RU 2.54% 6.13% -5.22% -4.61% 19.21% Emerging Europe Opportunities (Eastern Europe) 2.16% 20.53% 1.30% 2.63% 12.89% 0.70 2.08%Central Europe strategy 5.33% 20.77% -0.63% 0.73% 11.10% 0.70 2.60%Balkan strategy 7.44% 25.95% 3.10% 4.75% 10.83% 0.58 5.54%
Emerging Europe High-growth Exporters strategy 6.22% 32.69% 25.12% n.a 12.14% 0.26 18.61%
Emerging Europe OpportunitiesStrategy at a Glance
Invests in the stock markets of Emerging Europe (Central & Eastern Europe, the Baltics, Balkans)
Provides access to a robustly growing region, achieves better performance vs. benchmarks
Invests in regional large-cap, but also small & mid-cap fast growing companies, benchmark agnostic
Managed by a seasoned team with long tenure, based on the ground, with profound understanding of local markets
10+ years track record of strategy
Karoll Capital’sEmerging Europe Opportunities Strategy
Investment theme: invests across the stock markets of Emerging Europe (Central & Eastern Europe, the Baltics, Balkans)
Investment style: blended (value and growth), stock-picking, bottom up combined with top down and sector views
Target: to achieve higher return than the market at lower risk
Market cap: regional large cap, but also small & mid cap
Portfolio components: 70-100 positions
Low portfolio turnover and limited volatility
Offering format: Separately Managed Account
Minimum size of investment: €0.250 mln.
Fees: up to 1.5% on assets p.a. +15% performance fee, high-watermark
Highly-experienced team with long tenure & excellent understanding of local markets
Launch: October, 2006
Outperformance of Strategy vs. benchmark
Strategy vs. Benchmark,performance,
as of 31.01.2017 1 month YTD 1 year3 years
annualized 5 years,
annualized
Annualized
(since inception) Volatility Beta Alpha
MSCI EFM Europe +CIS -0.48% -0.48% 27.26% -1.72% -4.13% -4.12% 23.04%Emerging Europe
Opportunities Strategy 2.16% 2.16% 20.53% 1.30% 2.63% -2.19% 12.89% 0.7 2.08%
04.10.2006 04.10.2008 04.10.2010 04.10.2012 04.10.2014 04.10.2016 30
50
70
90
110
130
150
Strategy
Benchmark
Emerging Europe Opportunities Strategy
Geographic breakdown (31.01.2017) Sector breakdown
Top 5 positions % of portfolio Country Sector
GMK Norliski Nikel 3% Russia MetalsX5 Retail Group 2.4% Russia Retail
RICHTER GEDEON 2.2% Hungary HealthcareKRUK S.A. 2.1% Poland FinancialOTP BANK 2.1% Hungary Banks
24.0%
18.2%
10.0%9.1%
7.0%
6.6%
4.0%
3.6%
3.2%
3.0%
2.9%
2.5% 5.8%
RussiaPolandHungaryCzech RepublicTurkeyRomaniaBulgariaCroatiaSerbiaBalticsUkraineAustriaCash
12.4%
10.9%
6.4%
6.2%
5.4%4.6%4.7%
4.2%
4.6%
3.8%
3.2%
2.7%
25.0%Oil and gas
Banks
Metals
Retail
IT
Conglomerates
Healthcare
Agriculture
Industrial
Transportation
Utilities
Precious metals
Other
Emerging Europe High-Growth Exporters Karoll Capital’s highest alpha generating strategy
Investment theme: to invest in high-growth industrial, outsourcing and ICT companies benefiting from low labor costs, highly skilled workforce and lowest taxes in a fast-growing region with strategic location
Investment style: growth, benchmark agnostic, bottom-up
Market cap: small and mid cap.
Concentrated portfolio: 20-30 positions
Low portfolio turnover (<20%) and limited volatility
Offering format: Managed Account
Minimum size of investment: EUR 0.25 mln.
Fees: up to 1.5% on assets p.a. +15% performance fee, high-watermark
Highly-experienced team with long tenure and excellent understanding of local markets
Launch: April, 2013
Solid outperformance of Thematic Strategy
vs. benchmark
Strategy vs. Benchmark,performance,
as of 31.12.2016 1 month YTD 1 yearSince
inception
Annualized
(since inception) Volatility Beta Alpha
MSCI EFM Europe +CIS 9.33% 24.58% 24.58% -17.90% -5.15% 23.04%Thematic strategy
(Emerging Europe High-Growth Exporters) 4.61% 22.06% 22.06% 100.35% 20.01% 12.21% 0.26 17.31%
4/5/2013 4/5/2014 4/5/2015 4/5/20160
50
100
150
200
250
MSCI EFM Europe +CIS Strategy
Emerging Europe High-Growth Exporters
Geographic breakdown (31.12.2016) Sector breakdown
Top 5 positions % of portfolio Country Sector
CD Projekt 8.26% Poland IT Services & Consulting Uniwheels AG 6.75% Poland Automotive supplies
GMK Noril'skiy nikel' PAO 6.19% Russia Metals and miningNovolipetsk Steel PAO 5.73% Russia Metals and miningFabryki Mebli Forte SA 5.01% Poland Furniture
Poland43.12%
Russia23.03%
Turkey14.61%
Romania7.37%
Hungary4.15%
Bulgaria3.41%
Czech 2.40%
Ukraine1.91%
IT services and consulting
24.41%
Basic materials19.83%
Chemical9.24%
Household ap-pliances8.90%
Machinery8.66%
Wood products Furniture
8.63%
Pharmaceutical6.95%
Automotive supplies6.75%
Auto&Multi Utility Vehicles4.72%
Agriculture1.91%
Accessing investment opportunities in Emerging Europe is often obstructed by various challenges related to language barriers, cultural differences and transparency issues.To help our institutional clients make the most of what the region has to offer we provide a number of analytical tools:
quarterly strategy report & flash reports individual sector and stock reports upon requestmonthly performance statements, attribution analysesconference calls and discussions with investment committee memberson-site client visits upon request
Analytical Support for Institutional Clients
Karoll Capital’s UCITS Funds Advance Mutual Funds Family
Stock selection in Bulgaria & Romania
Stock selection in Eastern Europe
Stock selection in Central Europe
Local deposits, fixed income, repo-agreements
Flexible global multi-asset fund
Emerging Europe – the Overlooked Opportunity
While Central & Eastern Europe is a diverse region, it offers appreciable scale:350+ mln combined population
USD 4+ trln GDP (1/3 of euro-
zone total)3,000+ listed
companiesUSD 1+ trln
total market cap
Emerging Europe buoyant region converging with the rest of
Europe incubator for thriving companiesincreasingly participating in European & global supply chains vast number of companies shifting production here
Emerging Europe among the fastest growing regions
Source: IMF October 2016 outlook
2014 20152016e 2017f 2018f 2019f 2020f 2021fWorld 3.4% 3.2% 3.1% 3.4% 3.6% 3.7% 3.7% 3.8%Advanced economies 1.9% 2.1% 1.6% 1.8% 1.8% 1.8% 1.7% 1.7%Euro area 1.1% 2.0% 1.7% 1.5% 1.6% 1.5% 1.5% 1.5%European Union 1.6% 2.3% 1.9% 1.7% 1.8% 1.8% 1.8% 1.7%Emerging market and developing economies 4.6% 4.0% 4.2% 4.6% 4.8% 5.0% 5.1% 5.1%Commonwealth of Independent States 1.1% -2.8% -0.3% 1.4% 1.7% 2.1% 2.2% 2.4%Emerging and developing Asia 6.8% 6.6% 6.5% 6.3% 6.3% 6.4% 6.4% 6.4%Emerging and developing Europe 2.8% 3.6% 3.3% 3.1% 3.2% 3.1% 3.2% 3.2%Latin America and the Caribbean 1.0% 0.0% -0.6% 1.6% 2.1% 2.6% 2.7% 2.7%Middle East and North Africa 2.6% 2.1% 3.2% 3.2% 3.4% 3.6% 3.7% 3.6%Sub-Saharan Africa 5.1% 3.4% 1.4% 2.9% 3.6% 4.2% 4.3% 4.2%
Emerging Europe now a major production & services hub
CEE countries have become major automotive producers 26% of motor vehicles in Europe are produced here
Local suppliers steadily moving up the value chain
CEE is Europe’s Silicon Valley IT sector rapidly increasing its share of GDP with fast growing number of employees
Booming outsourcing sector CEE countries in top 20 ranking for Business Process Outsourcing
Emerging Europe growing much faster than developed
Europe
GDP growth (%)
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
Euro area
Emerging and developing Europe
Source: IMF April 2016 outlook
Emerging Europe growing at a much faster pace vs. developed Europe: +3.5% on avg b/n 2005 and 2015 vs. +0.8% for euro-area
Trend expected to persist in the following years
GDP growth (%)
Solid performance of regional economies continued in 2016
Russi
aEst
onia
Latvia
Ukraine
Euro-z
one av
erage
Hungar
yCro
atiaSer
bia
Lithuan
ia
Czech
Republi
c
Bulga
riaPol
andTur
key
Roman
ia
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
-0.6%
0.5%0.8%1.3%1.6%1.8%2.0%2.0%2.1%
2.6%3.0%3.1%3.1%
5.9%GDP growth Q2'16 y-o-y
Most regional economies are growing at a faster pace compared to the euro-zone average thanks to robust domestic consumption growth
Romania posted the highest GDP growth rate in the EU in Q2 2016
Recession in Russia is easing as it experienced the slowest contraction in Q2 2016 since it started to contract at the beginning of 2015
Ukraine bottomed out and returned to modest positive growth in Q1 with GDP figures accelerating in Q2
Source: Eurostat, National statistics institutes
Low levels of GDP p.c. = solid catch-up potential
GDP per capita (EUR), 2015
Source: Eurostat, IMF
Rising but still very low levels of GDP per capita: b/n 6 - 51% of euro-zone average
Euro areaCzech Republic
EstoniaLithuania
LatviaHungary
PolandCroatiaTurkeyRussia
RomaniaBulgaria
SerbiaUkraine
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
Compelling opportunities in Emerging Europe
Strategic location of the region ideally situated for building trade links between Western Europe, Middle East and Asia. Infrastructure has significantly improved in the past years with major investments planned in the mid term
region now deeply integrated with pan-European transport corridors
Most countries are current or future members of EU, OECD and NATO major changes in their economies and business environment. Some have already adopted the Euro. Legal, regulatory and business conditions have marked solid improvement; regulatory framework synchronized following EU accession.
CEE boasts well-educated and relatively inexpensive workforce
labor force with tertiary education steadily increasing. Wages on the rise, but still far below EU average.
Favorable tax regimes significantly lower tax rates (e.g. 10% corporate income tax in Bulgaria)
Stable economies with low level of government debt
Government debt/GDP, 2015
Source: Eurostat, IMF
Government debt in CEE at low levels: below 50% of GDP on average for the region vs. 91% for euro-zone
Euro areaCroatiaUkraine
SerbiaHungary
PolandLithuania
Czech RepublicRomania
LatviaTurkey
BulgariaRussia
Estonia
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
91%
87%80%
77%75%
51%43%
41%38%
36%
33%27%
18%10%
Emerging Europe boasts favorable tax regimes
Corporate tax rates
FranceUSA
BrazilMexico
IndiaGermany
ChinaIndonesia
Slovak RepublicCroatiaRussiaTurkeyEstonia
HungaryPoland
Czech RepublicUkraine
RomaniaSerbiaLatvia
LithuaniaBulgaria
0% 10% 20% 30% 40% 50% 60%55%
35%34%
30%30%30%
25%25%
22%20%20%20%20%
19%19%19%
18%16%
15%15%15%
10% Corporate and other taxes much lower in Central & Eastern Europe vs. developed world and major manufacturing hubs
Most regional states provide tax incentives and additional stimulus to attract foreign investors
Emerging Europeboasts highly educated & qualified workforce
Europ
ean U
nion
Eston
ia
Lithua
niaLat
viaPo
land
Bulgari
a
Hunga
ry
Czech R
epub
lic
Slovak
ia
Roman
ia0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
17.1
24.1
35.3
15.1
9.2
15.111.7
9.57.5
26.5
33.1 32.7
27.824.3 23.9
20.9 19.7 18.614.7
20002015
People with tertiary education (% of population)
Share of people with tertiary education in CEE steadily on the rise
Source: Eurostat
Labor costs significantly below those in the developed world
Labor costs per hour (EUR), 2015
While convergence has been driving wages in CEE higher, they are still far below European averages
Min wages range b/n €194 in Bulgaria and €425 in Turkey, compared to €1,473 in Germany and €1,500 in UK
Source: Eurostat
NorwayDenmarkBelgiumSweden
LuxembourgFrance
NetherlandsFinlandAustria
GermanyIreland
Euro zone averageItaly
United KingdomSpain
SloveniaCyprus
PortugalMalta
EstoniaSlovakia
Czech RepublicCroatiaPoland
HungaryLatvia
LithuaniaRomaniaBulgaria
0.0 10.0 20.0 30.0 40.0 50.0 60.051.2
41.339.1
37.436.2
35.134.1
33.032.432.2
30.029.7
28.125.7
21.215.815.6
13.213.0
10.310.09.99.6
8.67.57.16.8
5.04.1
High growth of employment in science & tech
Human resources in science and technology (% of active population) Science & tech
play an increasing role with R&D expenditures rising fast
The Czech Republic, Estonia, Hungary, Lithuania now spending over 1% of GDP on R&D
While this figure is still low compared to EU average of 2%, it is rapidly rising Source: Eurostat
EU
Estonia
Lithuan
iaLat
via
Poland
Czech Republic
Hungary
Bulgaria
Croatia
Slova
kia
Romania
0%
5%
10%
15%
20%
25%
30%
35%
27% 25%24%
22% 21%
30%
24%
21% 21%
25%
17%
32%30% 30%
28% 29%31%
28%
24%26%
24%
19%
20052015
Emerging Europe enjoys solid FDI flows
Services were the main recipient of FDI flows in the transition period driven by extensive privatization processes + market seeking and supply cost optimization
Banking systems and telecom operators now mostly in the hands of foreign investors, primarily from EU
FDI in manufacturing have been concentrated in: automotive sector, transport equipment, electrical equipment, food, chemicals & metals
Source: UNCTAD
Emerging Europeabundant resources provided by EUSince these countries became EU members, EU co-financing has become an essential factor for their development EU Structural and Cohesion Funds accounted for 11.3 - 25% of annual GDP in 2007-2013, fostering regional cohesion Large part of EU SCF financed major infrastructure projects, but also environment projects, renewable energy, SMEs, education & health, information society, increasing the adaptability of workers and enterprises, strengthening of institutional capacity
PolandCzech Republic Hungary Romania Slovakia Lithuania BulgariaLatvia Slovenia Estonia Croatia
EU funds, 2007-2013 (EUR, bln.) 67.19 26.3 24.92 19.18 11.65 6.77 6.67 4.54 4.1 3.4 1EU funds/GDP (%) 17.2% 17.6% 25.4% 13.4% 16.2% 19.6% 16.7% 19.4% 11.6% 18.5% 2.3%
Total: €175.7 bln = 16.2% of GDP on average
EU cohesion policy 2014-2020 to provide further boost to regional
competitiveness
0
10
20
30
40
50
60
70
8077.6
32.828.6
23 22 21.921.519.215.915.5 14 11.88.6
7.6 6.8 4.5 3.63.1 2.3 2.1 1.51.4 1.21.2 0.7 0.7 0.6 0.1
EU cohesion policy 2014-2020, allocation by country (EUR bln)
CEE to receive over 50% of EU 2014-2020 Cohesion Policy = more than €190 bln
EU 2014-2020 Cohesion Policy targets: R&D, ICT sector, sustainable transport, SMEs, renewable energy & energy efficiency, environment, employment and education
Competitiveness of local economies steadily on the rise
Country Rank, 2006
Rank, 2016
Change of position
Estonia 18 16 2 Lithuania 22 20 2 Poland 56 25 31 Slovenia 42 29 13 Slovakia 32 29 3 Czech Republic 59 36 23 Romania 62 37 25 Mexico 58 38 20 Bulgaria 48 38 10 Hungary 46 42 4 Thailand 23 49 -26 Russia 95 51 44 Turkey 60 55 5 Croatia 115 65 50 Vietnam 75 78 -3 China 89 90 -1 Serbia 78 91 -13 Indonesia 114 114 0 India 116 130 -14
Competitiveness of local economies has registered rapid advance as measured by the Ease of Doing Business Ranking by the World Bank
Most CEE countries are in top 50
5 countries hold a position in top 30
Rising role in European value chains
Polan
dRuss
ia
Czech R
epub
lic
Hunga
ryTu
rkey
Roman
ia
Bulgari
a
Lithu
ania
Ukraine
Eston
iaSe
rbia
Croatia
Latvi
a0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
56.7
114.0
54.041.6 36.2
15.85.7 6.2 8.7 4.8 1.2 4.5 3.2
141.6135.7
119.1
72.461.6
40.2
14.9 14.1 12.8 8.7 7.9 7.7 7.5
20052015
Export of Emerging Europe countries to EU (EUR bln)
Export of CEE countries to EU have jumped by more than 80% b/n 2005 - 2015
Share in total EU imports now above 37% (2005: 29.8%) and significantly lower before that
Most countries export over 50% of production to EU
2015Czech Republic 83.4%Hungary 81.4%Poland 79.2%Estonia 75.2%Romania 73.7%Latvia 69.5%Croatia 65.9%Bulgaria 64.2%Serbia 63.7%Lithuania 61.3%Turkey 44.5%Russia 44.4%Ukraine 24.2%
Share of export to the EU in total export (2015)
Source: Eurostat, KCM calculations
Eastern Europebecoming a major manufacturing hub for
multinationals For 15 years the regions has seen massive inflows of foreign investors
Following the GFC there is a clear trend of Emerging Europe establishing itself as a major manufacturing hub
Much lower production costs – labor, office rentals, electricity, taxes and other incentives many multinationals shifting production to Eastern Europe
Location becoming more important – proximity, both in geographical and cultural terms, favors Eastern Europe over Asia and Latin America
EU membership and accession make trading much easier
NEARSHORING gaining popularity
Emerging Europe vs. Asia
Eastern Europe increasingly recognizing the importance of quality as a differentiator to low-cost Asian producers
Wages have been growing robustly in Asia in the past years with wage gap b/n Eastern Europe and Asia narrowing; wages in China have more than tripled in the past decade
Realizing the trend of nearshoring, even Asian companies are investing in the region
Emerging Europe now moving up the value chain from low-cost manufacturing centers, regional economies now facing the challenge to become innovative knowledge-based economies
Rather than viewing the CEE region as a cheap production base, multinationals increasingly consider it to be a source of expertise.
The trend will continue and a deep supplier base will emerge here as local companies become integrated into global supply chains.
Production gains in CEE have come from better management rather than from growing population and capital investment (the Asian case).
Automotive sector in CEE
Assessing the potential of the region, Western European and Asian companies invested in local automakers and established new companies. Fiat acquired Poland’s FSM in 1992; Volkswagen took over Škoda in the Czech Republic in 1991; and Renault bought Dacia in Romania in 1998. Audi, Opel, and Suzuki all opened plants in Hungary; Peugeot, Toyota, and Hyundai established operations in the Czech Republic; and Peugeot Citroën invested in Slovakia. Renault, Toyota, Hyundai, Honda, Ford and Fiat all have production facilities in Turkey. Russia is the top producer in the whole CEE region with sizable production by Hyundai, Renault, Volkswagen, Nissan, General Motors and others.
Along with the automakers came automotive parts suppliers, creating automotive clusters across the region. The factory of Audi in Hungary is now the biggest car engines producer in the world.
Nearly 2/3 of automotive exports go to EU‑15 markets, and 60% of sales are concentrated in Germany, the UK, and France
Booming car production in CEE
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,0001,354,504
879,452
602,237
218,349
613,200
152,015 194,802
14,179
1,384,3991,358,7961,303,603
1,000,001
660,603
495,370387,177
83,630
20052015
Motor vehicles production in CEE (units)
Car production rose nearly 70% from 2005 to 2015, with Slovakia, Czech Republic and Hungary more than doubling production
Renault now with over 35% of total production in CEESource: International Organization of Motor Vehicle
Manufacturers
Eastern Europe – the new Silicon Valley
The human assets of the region make it a major player in technological innovation Forbes consistently ranks CEE at the top of the world in educational achievement in math, science & technology.
In 2013, 16 out of the 24 finalists of Google's annual Code Jam programming competition were from Central and Eastern Europe
Solid growth of number of employees in ICT sector (Estonia: +128% in the past 10 years, Romania: +120%, Bulgaria: +84%).
Many significant tech businesses have started in CEE:- Skype founded by Estonians, acquired by Microsoft for $8.5 bln - Whatsapp founded by Ukrainian, acquired by Facebook for $19 bln - Prezi launched in Hungary as online tool for creating presentations- Major cyber security companies - AVG Technologies, Avast and ESET, in
the Czech Republic and Slovakia
Abundant EU funding supports start-ups from the tech sector
48
Emerging Europe stock markets lagging behind
7/1/20056/1/2006
5/1/20074/1/2008
3/1/20092/1/2010
1/1/2011
12/1/2011
11/1/2012
10/1/20139/1/2014
8/1/20157/1/2016
0.000
50.000
100.000
150.000
200.000
250.000
300.000
ACWI EFM EUROPE + CIS EM ASIA EM LATIN AMERICA EUROPE NORTH AMERICA
Performance of MSCI EFM Europe+CIS, EUR as of 31.12.20163M 15.46%
YTD 24.4%1Y 24.40%
3Y, annualized
-3.91%
5Y, annualized
-1.52%
10Y, annualized
-5.43%
since 2007 peak
-49.7%
Emerging Europeattractive valuation ratios across the
region
Source: Reuters
P/E ratios, ttm
Emerging Europe P/E ratios by country (ttm)
50
Source: Thompson Reuters, KCM calculations
Compelling reasons to invest in CEE
-CEE turning into major manufacturing hub -> rising role in global value chains (over 50% of exports to EU)
-Major global companies shift production here -> solid FDIs in automotive sector, transport equipment, electrical equipment, food, chemicals & metals
-CEE turning into the new Silicon Valley due to highly qualified IT specialists-Booming outsourcing sector -> CEE countries in top 20 for Business Process Outsourcing.
-Buoyant region with appreciable scale converging with the West-Growing much faster than developed Europe
-Among lowest taxes in the world-Low labor costs –> 27% of euro-zone average
-Well-educated & highly qualified workforce-Abundant EU funding boosts competitiveness-Geographic & cultural proximity to the West
-Greater focus on quality vs. low cost Asian producers
Why invest in Emerging Europe nowSolid catch-up potential based on lagging performance in recent yearsImproving sentiment towards emerging markets as a whole has sparked uptrendAttractive valuation ratios with multiples lower than peers and historic averagesLow market penetration = solid catch-up potential Improving liquidity
Take advantage of the Emerging Europe opportunities with Karoll Capital’s flagship strategies: >>> Emerging Europe Opportunities >>> Emerging Europe High-Growth Exporters
Contact us at:
Daniel Ganev, MBAManaging Director,Karoll Capital Management
E-mail: [email protected]: +359 2 400 8 382
Nadia Nedelcheva, CFAHead of Portfolio Management,Karoll Capital Management
E-mail: [email protected]: +359 2 400 8 386
Headquarters Sofia 1 Zlatovrah Str., Sofia 1164, Bulgaria | (+359 2) / 4008 382 | [email protected] www.karollcapital.bg
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