Eastern European markets continue to be led by Russia, where the rouble lost another 8% of its value during the month against the US dollar. The central bank’s USD 27 billion intervention as well as its decision to raise interest rates by 150 basis points did little to stem the pressure on the currency.
Food retailer Magnit: Going from strength to strength
Although the portfolio’s Russian exposure proved negative overall, not all companies are suffering in the current poor macro environment. Value food retailer Magnit, for example, continues to go from strength to strength. Benefiting from higher food price inflation and accelerating traffic as customers shift from corner shops and open air markets to discounters, Magnit looks set to produce another record year and this was reflected in the stock’s sharp share price rise. On the downside however, internet firm Mail.Ru lost 14% despite completing the long-awaited acquisition of VKontakte. What had previously been considered a key catalyst for the stock was broadly overlooked as the market focused on weakness in display advertising. Whilst Mail.Ru faces some short-term growth headwinds, the medium term continues to represent a very attractive opportunity. In addition, a new law proposed for 2016 that will force the storage of personal information on servers based in Russia, could be good news for Russian internet stocks.
Turkey: The standout market in Eastern Europe
Elsewhere in the region Turkey was the standout market, rising more than 10%. In many ways what is bad for Russia is good for Turkey, in particular falling oil prices reduce the current account deficit. In addition, a number of positive indicators released during the month suggested that growth may be picking up into the third quarter supported by better domestic demand conditions. The release of lower than expected inflation numbers also provided some relief following a succession of disappointing readings, with some moderation in core inflation supportive of a better outlook. This should give the central bank a bit more room for manoeuvre and perhaps allow it to take steps that would be more supportive of growth.
Gazprom struggles
Amongst portfolio changes during the month, Russian energy giant Gazprom has been divested. Despite its continued strong profitability, with margins close to 40%, Gazprom struggles to convert this into meaningful free cash flow generation. The case for owning it in a regional portfolio is now difficult to argue given the new sanctions environment and rising cost of financing.
Stefan Herz, Charlemagne Capital
