Eng Est

Entrepreneurial Investment Managers

Monthly Overview

Global Risk Appetite Declines, New Europe Equities Retreat

July saw the ever bullish equity markets take a breath as various global political risks increased and as investors became concerned over sluggish growth in Europe and potential tightening by the Federal Reserve. Once again New European markets moved in correlation with Western Europe rather than with wider Emerging Markets (which advanced in July, led by strong performance of Chinese equities). All larger New European equity indices declined in July with the benchmark index Stoxx EU Enlarged TR index dropping 3.9% during the month. Our New Europe Fund retreated 4.7% during the month, slightly underperforming the index. The Fund has outperformed the benchmark index by 2.8 percentage points YTD. Over 12 months, the Fund has outperformed the index by 10.5 percentage points, while the outperformance for 3 and 5 years stands at 43.8 and 88.7 percentage points, respectively.

Once again the headlines were occupied by tensions in Ukraine. As the EU and US moved on to the third round of sanctions, Russia has threatened to retaliate with counter-measures, which would most probably hit the EU’s agricultural sector the hardest. Considering the overall trade activity between CEE economies and Russia, the wider impact to the region’s economy is likely to remain fairly small. Poland, which is one of the most active trade partners for Russia in CEE region, has estimated that the Ukrainian conflict and imposed sanctions are likely to slow its 2014 growth by ca. 0.6 percentage points.

In terms of country allocations, we remain underweight in Polish equities as we have been throughout 2014. We continue to see potential selling pressure by local pension funds, following the ongoing pension reform. The reform past another benchmark in July as the deadline arrived for people to decide whether to continue the payments into the private pension system. While the analysts had expected a participation rate of 30-50% just six months ago, we have been much less optimistic on this number and underweighting or avoiding companies where pension funds own large stakes. The actual participation rate came in at just 12-13%, which means that the Polish private pension system will see roughly zero net inflows going forward. At the same time, their investment limitations are gradually lifted (most importantly, previously they had to invest at least 95% of their assets into Polish names). As Polish equities have been trading at a premium to other regional markets over the past years, we see this as a very important development that is likely to remove that premium as the local pension funds are no longer an ever-present forced buyer in their own local market.

Past performance of the fund does not guarantee or indicate future performance of the fund. More detailed data about the performance of the funds in different time periods is shown in the monthly factsheets. The value of the fund units may increase and decrease over time, therefore there is no guarantee that the investors get back the amount invested in the fund. The risk factors of the fund are described in further detail in the prospectus of the fund.