nestor osteuropa bond: investing in the eastern european bond market
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NESTOR Osteuropa Bond: Investing in the Eastern European bond market. General information on Eastern Europe. This region comprises countries whose economies are in markedly different stages of development and which come in a variety of shapes and sizes - PowerPoint PPT PresentationTRANSCRIPT
19.04.23
NESTOR Osteuropa Bond: Investing in the Eastern European bond market
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General information on Eastern Europe
This region comprises countries whose economies are in markedly different stages of development and which come in a variety of shapes and sizes
New EU member states: 10 countries including the Baltic states, Bulgaria and Romania
Then there are the 12 independent states of the former Soviet Union, with the main focus on Russia, Ukraine and Kazakhstan.
Plus South-Eastern Europe: Croatia, Albania, Bosnia and Herzegovina, Macedonia and Serbia
Macroeconomic trends in Eastern Europe: Russia
Economy is expected to experience a V-shape recovery amid positive external factors and improving local consumption
3
-10
-5
0
5
10
15
2005 2006 2007 2008 2009 2010f
6.47.7 8.1
5.6
-7.9
4.9
10.9
9
11.913.3
8.87.1
119.6
5.9 6.2
4 4.7
GDP growth (%) Consumer prices (%) CA/GDP (%)
Macroeconomic trends in Eastern Europe: Russia
Historically solid structural position remains, despite sizeable budget deficits in 2009 and 2010
4
-10
0
10
20
30
40
2005 2006 2007 2008 2009 2010f
33.531.4
36
29.1
38.4
34.1
23.7
30.7
36.9
25.5
35.632.8
7.5 7.45.4 4.1
-5.9 -4.6
External Debt/GDP (%) Reserves/GDP (%) Fiscal Balance/GDP (%)
5
Macroeconomic trends in Eastern Europe: Ukraine
-20
-15
-10
-5
0
5
10
15
20
25
2005 2006 2007 2008 2009 2010f
2.7
7.3 7.6
2.1
-15.1
3.9
10.3 11.6
16.6
22.3
12.310.8
2.9
-1.5-3.7
-7.1
-1.5-0.1
GDP growth (%) Consumer prices (%) CA/GDP (%)
Ukraine was hit the hardest by the economic crisis in 2009. An improvement is expected for 2010. Its external position has stabilized
Macroeconomic trends in Eastern Europe: Ukraine
Political stabilization and a new IMF $15b programme are very positive for country’s fiscal situation and deficit financing ability, thus solvency
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-20
0
20
40
60
80
100
2005 2006 2007 2008 2009 2010f
41.8 42.952
56.8
85.780.7
22.5 20.8 22.817.5
22.6 21.7
-1.8 -0.7 -1.1 -1.5-11.3 -6.5
External Debt/GDP (%) Reserves/GDP (%) Fiscal Balance/GDP (%)
Macroeconomic trends in Eastern Europe: Kazakhstan
Kazakhstan was the first victim of the financial crisis. It is now leading the recovery
Outflows abroad should stabilize in 2010
7
-10
-5
0
5
10
15
20
2005 2006 2007 2008 2009 2010f
9.710.7
8.9
3.2
1.22.4
7.68.6
10.8
17
7.3 7.3
-1.8 -2.5
-7.8
5.3
-3.1
0.7
GDP growth (%) CPI (%) CA/GDP (%)
Macroeconomic trends in Eastern Europe: Kazakhstan
Budget deficits and currency reserves are within reasonable ranges. Reserves are growing steadily
Borrowing from abroad will fall in 2010 as the foreign debt of the banking sector is restructured
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-20
0
20
40
60
80
100
120
2005 2006 2007 2008 2009
76.0
91.5 92.8
81.1
101.9
26.5
41.1 37.0 35.543.5
0.6 0.8
-1.7 -2.5 -3.8
External Debt/GDP (%) Reserves/GDP (%) Fiscal Balance/GDP (%)
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Macroeconomic trends in Eastern Europe: recovery in industrial output
The clear trend in the CIS region has been one of fundamental economic recovery since 2Q09. The very last few months demonstrated some slowdown of recovery, but no double-dip
Only in Kazakhstan, however, has industrial output reached pre-crisis levels.
Kazakhstan's growth is being driven by the oil and gas sectors and by increasing economic ties with China.
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60
65
70
75
80
85
90
95
100
105
110
115
Russia
Ukraine
Kazakhstan
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Eastern European credit markets I
90
100
110
120
130
Dec-09 J an-10 F eb-10 Mar-10 Apr-10 May-10 J un-10 J ul-10
T DI R uss ia T DI Ukraine T DI K azakhstan
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Eastern European credit markets II
CIS debt market performance YTD as represented by family of TDI* indices
High-beta markets (e.g. Ukraine and Kazakhstan) strongly outperformed amid strong investors’ risk appetite and country-specific drivers:
In Ukraine - political power consolidation and successful cooperation with IMF
In Kazakhstan, finalization of banking sector’s restructuring
May’10 has been the only month on Russian debt market with negative performance during the last 17 months
Activity on the primary market has been elevated, as Russian issuers placed almost $20bn in Eurobonds, while companies from Ukraine and Kazakhstan borrowed ca. $4bn in total
Still no representative index of Central-Eastern Europe debt markets available
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NESTOR Osteuropa Bond performance
Fund’s official benchmark* significantly outperformed (7.5% vs 2.3%) in 7m10
Among peers, NESTOR Osteuropa Bond Fund has a long track-record and solid performance
The Fund has demonstrated comparable annualized return at lower volatility since inception compared to peers, justifying its benchmark-unaware style
* 6-
mon
ths
Eur
ibor
+ 3
%
Peer Funds´ Indexed Performance
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60
70
80
90
100
110
120
130
140
Dec-0
3
Jun-
04
Dec-0
4
Jun-
05
Dec-0
5
Jun-
06
Dec-0
6
Jun-
07
Dec-0
7
Jun-
08
Dec-0
8
Jun-
09
Dec-0
9
Jun-
10
NESTOR Osteuropa Bond Fonds
UBS Russia Bond Fund
Evli Russia Debt Fund
DWS Russia Bond Fund
Peer Funds´ risk and performance characteristics since inception
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Risk/Return comparison, since inception
DWS Russia Bond Fund
Evli Russia Debt Fund
UBS Russia Bond Fund
NESTOR Osteuropa
Bond Fonds
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%
Ret
urn
calc
ulat
ed a
s an
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ized
ret
urn
sinc
e ea
ch f
und’
s in
cept
ion
date
(y-
axis
).
Ris
k ex
pres
sed
as s
tand
ard
devi
atio
n of
dai
ly o
ne-y
ear
retu
rns
for
each
fun
d’s
lifet
ime
(x-a
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NESTOR Osteuropa Bond composition
Issuer Country Maturity date Weighting
Bank CenterCredit Kazakhstan 2 Feb 2011 5.58%
Bank of Georgia Georgia 8 Feb 2012 5.53%
Azovstal Ukraine 28 Feb 2011 5.43%
Gazprom Russia 1 Feb 2020 4.97%
Eesti Energia Estonia 18 Nov 2020 4.81%
Eurochem Russia 21 Mar 2012 4.74%
NCSP Russia 17 May 2012 4.61%
ATF Bank Kazakhstan 28 Oct 2010 4.57%
Parex Bank Latvia 5 May 2011 4.49%
MOL Hungary 5 Oct 2015 4.27%
Total 48.99%
Oil and gas, 12.1%
Transportation, 8.2%
Industrials, 7.8%
Energy, 4.8%
Chemicals, 4.7%
Real estate and construction, 3.0%
Retail, 2.6%
Net cash, 15.3%
Media and telecommunications,
3.8%
Banks and financials, 37.7%
NESTOR Osteuropa Bond composition
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33.7%
65.6%
99.4%
66.3%
-65.6%
0.7%
-80.0%
-60.0%
-40.0%
-20.0%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
Before hedge FX hedge After hedge
EUR USDUkraine, 13.9%
Kazakhstan, 12.9%
Georgia, 9.1%
Estonia, 7.5%
Poland , 6.2%
Hungary, 4.3%
Bulgaria, 3.0%
Net cash, 15.3%
Russia, 23.3%
Latvia, 4.5%
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Bank CenterCredit, Kazakhstan, Moody’s Ba3, Fitch B; maturing on 2 Feb 2011
Kazakhstan’s fourth largest bank with a wide network of 200 branches across Kazakhstan with a focus on retail and SME
The largest bank of South Korea Kookmin Bank (A1/A/A) together with IFC jointly control the bank (51.9% ownership)
The bank enjoys best asset quality among peers and no government stake, as the bank refused to accept governmental support in the time of systemic crisis
Low leveraged systemically-important bank which benefits from strong shareholders, long-term profile of its debt and overliquidity:
43% of assets in cash and government bonds!
Loans/Deposits 91%
Status of bond in fund as at 30 July 2010: YTM 6%, term of 0.49 years
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Bank of Georgia, Georgia, Moody’s Ba3, S&P B, Fitch B+; maturing on 8 Feb 2012
Largest private bank in Georgia by far (around one third of market share); has to some extent the characteristics of a monopoly
Strong support from IFI, EBRD, IFC and OPIC through the provision of comprehensive long-term loans and subordinated loans at favourable conditions
Overcapitalized, overliquid bank with a capital ratio of 32.2% and cash of 38.7%
No significant repayments before the Eurobond issue matures
Status of bond in fund as at 30 July 2010: YTM 9.3%, term of 1.4 years
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Azovstal, Ukraine, Moody’s B3, Fitch B-; maturing on 28 Feb 2011
One of the largest steel plants in Ukraine: key asset of vertically integrated steel holding Metinvest (part of Mr. R. Akhmetov-controlled SCM Group)
Exports over 80% of its products, partly to affiliated companies located in Western Europe
Political environment is extremely beneficial after presidential elections, as the owner Mr. Akhmetov has a strong influence in the now ruling Party of Regions
Low leverage: Debt/EBITDA constantly below 2x
Recent Metinvest bond issuance improved liquidity of the group, making it easier to redeem Azovstal bond in February
Bond repayment is a matter of Group reputation (Metinvest aims to tap global financial markets for an IPO). In addition, the new Metinvest bonds include cross-default on Azovstal debt
Status of bond in fund as at 30 July 2010: YTM 12.3%, term of 0.6 years
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Gazprom Russia, Fitch A-; maturing on 1 Feb 2020
Gazprom is one of the world’s largest integrated oil & gas companies with operations in CIS and Europe. Besides, it owns and operates the world’s largest gas transportation, storage and processing system exceeding 159 thousand km
Gazprom is a pure quasi-sovereign issuer, as under the Gas Supply Law the state will maintain a majority ownership stake in the company going forward
Despite weak operational environment, its debt/EBITDA ratio at the end of 2009 was moderate – 1.5x
Gazprom is well recognized borrower, as it was the first CIS company able to borrow on Eurobond market following a Lehman Brothers collapse
Bond valuation in fund as at 3 July 2010: YTM 6.3%, maturity of 3.1 years
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Structural portfolio – changesin 7 months 2010 I
In 2010-to-date, the driving themes in the portfolio have been:
Riding the cyclical recovery and booking gains when undervaluation disappeared (e.g., banking, metals and mining)
Adding positions outside CIS, which lost the clear undervaluation status during the period
Reinvest in instruments selected on a bottom-up basis to reduced the beta of the portfolio
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Structural portfolio – changesin 7 months 2010 II
More specifically, across sectors the following changes took place:
Banking sector (our favorite at the start of 2010) has significantly decreased (from 60% to 40%) due to redemptions (Ukrsots’10, Russkiy Standart’10) and sold/reduced positions (Bank of Georgia, Halyk, Privatbank, VTB, BTA)
Metals and mining have also significantly reduced (by 9%) as we took profits in Severstal, Raspadskaya, Kazakhgold (in the former two cases excellent timing of trades)
Media (Polish TVN), transportation (Georgian Railways) and oil&gas (Alliance oil) have been increased the most in the Fund, but bottom-up factors rather than industry views have been the drivers
New sectors: utilities (Zagreb Hld.) and energy (Eesti Energia)
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Structural portfolio – changesin 7M10 IV
In terms of countries:
Our 2010-start top-pick Russia was reduced most (8.6% to 25%), “exotic” Azerbaijan eliminated (put option used on Technikabank)
Increased/new countries – Poland (+4.7%), Estonia (+3.7%), Georgia (+3.5%)
As the attractive short-duration opportunities matured/rallied, the overall portfolio duration increased from 1.9 to 2.6 during the period
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Investment process
Third party researchInternal investment universe review (bi-weekly)
New issues
Idea list to buy Idea list to sell
Weekly portfolio movers review
PORTFOLIO
Internal rating assignedFair spread assigned
Internal rating revisedFair spread reassessed
Idea screening for further investigation (weekly meeting)=> Weekly agenda for analysts
Undervalued => include in buy-list
Overvalued => include in sell list
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Investment process
Our investment process is completely benchmark-unaware
We seek and evaluate opportunities on a stand-alone risk/return merits
The selection process used follows a bottom-up approach. The starting point is knowledge of the local conditions coupled with internal research findings and bond-specific considerations
Internal ratings are assigned, as are fair spread levels based on market data (valuation score <1 implies undervaluation, >1 implies overvaluation)
Buy and sell signals are derived as a result
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Investment process example 1Total return = 37.2% (40.3% p.a.)
BUY Actual spread – 1340bpInternal rating – Ba3Fair spread – 913bpValuation score – 0.68x SELL
Actual spread – 341bpInternal rating – Ba3Fair spread – 43\8bpValuation score – 1.29x
Raspadskaya 7.5% 21012
Russia's second largest coal producer
One of strongest credits in Russian metals & mining segment with debt/EBITDA at 0.5x FY08 and 1.3 FY09
Bought 18.5.2009: 81.00 (valuation score 0.68x)
Sold 20.4.2010: 105.50 (valuation score 1.29)
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Investment process example 2Total return = 43.4% (51.6% p.a.)
BUY Actual spread – 1382bpInternal rating – Ba2Fair spread – 726bpValuation score – 0.53x
SELL Actual spread – 440bpInternal rating – Ba3Fair spread – 465bpValuation score – 1.06x
Severstal 9.75% 2013
One of the world’s leading vertically integrated steel and mining companies with key assets in Russia, the US and Europe
Conservative debt and liquidity management with cash surpassing short-term debt at all times
Bought 12.5.2009: 81.75 (valuation score 0.53x)
Sold 15.03.2010: 110.50 (valuation score 1.06x)
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Investment process example 3Total return = 16.3% (50.1% p.a.)
BUY Actual spread – 747bpInternal rating – Baa3Fair spread – 368bpValuation score – 0.49x
SELL Actual spread – 503bpInternal rating – Baa3Fair spread – 311bpValuation score – 0.62x
Kazmunaigaz 11.75% 2015
Kazakh vertically integrated national oil&gas champion which consolidates around a fifth of country’s oil production
High importance for the country and healthy cash generation. Was undervalued relative to Gazprom and local peers, but started to leverage up its balance sheet significantly
Bought on 11.08.2009: 106.00 (valuation score 0.49x)
Sold out on 08.12.2009: 119.25 (valuation score 0.62x)
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Outlook for 2010 I
We expect global deflationary environment along with further quantitative easing policies to continue and to support emerging market debt also in H2’2010
Fundamentally, credit-risk metrics are still generally favourable for emerging market debt relative to developed markets
In Eastern Europe, this is clearly the case for Russia, Kazakhstan, Poland
In Ukraine, the radical change in political environment along with the new IMF program expected to further normalize macroeconomic environment, fiscal and external balances
In the short-term, however, technicals may cause market corrections, which we think should be used to “buy on dips”:
Yields of many debt instruments are at their all-time lows
But credit spreads are still wider than before the start of the crisis
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Outlook for 2010 II
In sum, while we see further upside to the market over medium-term, the period of “easy money” appears to be behind us
In relative terms, in Eastern European debt markets we continue to prefer Ukraine and Kazakhstan to Russia, yet in all markets security selection has become increasingly important
As usual, in Central Europe’s eurobond market bottom-up approach is the basis for investing
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Strategy for 2010
Strategy of the Fund remains largely unchanged from the start of the year
We will continue to concentrate on bottom-up approach, i.e., careful issuer-specific fundamental analysis will remain the backbone in security selection =>
Industry and country allocations are a by-product, not a determinant
Duration depends on credit opinion about a certain issuer – for some we prefer short duration, for others long duration instruments
Strategy for 2010
However, the general trends in the Fund are expected to be:
Gradual reduction in Ukraine weighting as instruments achieve their fair levels
Further reduction of the less liquid positions (e.g., Estonia)
Overall portfolio duration (now at 2.6) expected to remain roughly unchanged
Each primary corporate debt placement will continue to be carefully assessed
CEE opportunities evaluated on a case-by-case basis, more exposure in these more stable markets may be acquired
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Contact details
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Distributor:NESTOR-Fonds-Vertriebs-GmbH, Ottostraße 5, D-80333 Munich
Tel.: +49 (0) 89 / 54 59 03 80Fax: +49 (0) 89 / 54 59 03 85
E-mail: [email protected]
www.nestor-fonds.comwww.nestor-fonds.com/en (English)www.nestor-fonds.com/fr (français)
Investment company:NESTOR Investment Management S.A., B.P. 858, L-2018 Luxembourg
Tel.: +352 / 42 70 42Fax: +352 / 42 74 54
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Legal notice
The tax treatment depends on the individual circumstances of the investor and is subject to change. More detailed information on taxation can be found in the prospectus. Anyone wishing to buy, hold or sell investment units should therefore consult a tax advisor about the individual tax implications arising from the purchase, holding or sale of the investment units described in this publication. Performance is calculated using the BVI method, i.e. the load is excluded. Past performance, simulations and forecasts are no indication of future performance. Future performance depends on a number of factors including capital market trends, interest rates and inflation and cannot therefore be forecast. For the advisory services, the intermediary receives a fee from the load and the management fee. The intermediary or NESTOR can provide detailed information on request. NESTOR accepts no liability for any losses arising from the use and/or distribution of this document.
NESTOR Investment Management S.A.- Management -
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Appendix, Citadele Asset Management
Andris KotānsFund ManagerCitadele Asset Management
Edgars LaoBond AnalystCitadele Asset Management
Igors DanilovsBond AnalystCitadele Asset Management
37
Appendix, Citadele Asset Management
During Parex Bank restructuring process, the name of Parex Asset Management changed to Citadele Asset Management effective August 1, 2010. Shareholding/legal form/operations of the investment managed have not been affected by this change in any way
The leading investment specialist and asset manager in the Baltic states
Strong track record of successful product launches in Eastern Europe
Eastern European bond and balanced funds
Russian, Ukrainian and Baltic equity funds
Local presence in Ukraine, the Baltic states, Russia, Kazakhstan and Germany
Appendix, Citadele Asset Management
Asset management for clients in different regions: Main objective is to generate absolute returns under all market conditions
Leading local supplier of a complete product range for regional private and institutional clients
Financial products from all leading global asset managers, with comprehensive offering of all asset classes and investment strategies spanning the entire globe
A team of 70 experts with local and international experience
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