Today, we’re excited to bring you our annual interview featuring three portfolio managers from reputable international Asset Management Companies that are actively investing in our markets. They offer invaluable insights into the Croatian, Slovenian, and Romanian Stock Markets, providing a comprehensive view of how asset management is shaping the region. Spare a few minutes and delve into their perspective of the regional capital markets.
At the beginning of the year, we decided to interview three portfolio managers who are veterans of investing in our markets and who can give valuable feedback on the way they see our markets. In this article, they reveal to us what it is that they look for in investment target, their expectations for 2024 and their ideas on how to improve the markets going forward.
Can you, please, share your expectations for Slovenian, Croatian and Romanian economies in 2024?
Tamas (HOLD Asset Management): We expect a weakish, but probably still positive year for the European economy and somewhat better growth for these economies. The monetary tightening, that was enacted over the last two years, will still slow the European economy this year due to lagging effects, even though the tightening is probably over. Two positive developments can counterbalance this. One is that labour markets remained tight in most of the countries and real wages are turning positive, while there are still some excess savings from the pandemic years. This should help the consumer. And secondly, there is currently a further significant decrease in long-term forward energy prices (gas and electricity) in Europe, which is also positive.
One issue that the European countries will need to deal with in the upcoming period is the inflated budget deficits. And here, there are significant differences. While Croatia and Slovenia are among the better countries in Europe, Romania is clearly among the problematic ones. This, coupled with the upcoming election there, might bring volatility both to the economy and to the markets. The announced very high Romanian pension increase could further exacerbate this delicate situation.
Valdur (Avaron Asset Management): Given the expectations of slowing global growth it is unlikely we shall see the strong economic environment in the region. The weak economic outlook of developed Europe, especially Germany does not bode well for exporters and the manufacturing sector. Trends in the industry in these 3 countries are subdued and in the presence of rather high inventory levels, it is difficult to see meaningful improvement before a swing in the global and Eurozone growth trajectory. In 2023 private consumption supported the SEE economies more than we anticipated on the back of continually tight labour markets. In Croatia, Romania and Slovenia this translated into positive real wage growth that enabled consumers to spend. As inflation is subsiding, we expect positive real wage growth to continue and support household consumption. Tailwind that should offset the weakness in manufacturing should come from the deployment of RRF funds and increased investment activity. As a base case, we use a 2% growth expectation for Croatia and Slovenia and a bit higher for Romania in our modeling. The latter has more flexibility on the monetary policy front to support the local economy if needed. On the flip side, Romania has visibly higher risks related to large twin deficits that need to be managed
Mehis (Trigon Asset Management): All three countries did relatively well compared to other EU countries in 2023 backed by a strong tourism season in Croatia and Slovenia and healthy utilization of EU funds in Romania and Croatia. 2024 should see recovery in most European countries due to easing monetary conditions and recovering domestic demand. The same drivers should be visible in Romania and Slovenia in 2024 taking the GDP growth to 2-2.5% levels. In Croatia, the 2023 high base will be hard to beat, therefore, some decline in headline GDP could be seen as the domestic demand and investments growth trend is moderating. On the political front, Romania will face multiple elections in 2024, with European, parliamentary, presidential, and municipal elections all taking place within a six-month period. Considering the non-sustainable, high twin deficits that Romania is running, investors should be prepared for possible tax hikes after the elections.
What are your top pics and/or sectors in these markets?
Tamas (HOLD Asset Management): Our top pick from these markets is DIGI, the Romanian telecommunication company for company-specific reasons. We see this company as a very efficient infrastructure builder (fiber networks), where value creation is masked by its very fast growth. If it would stop growing and consolidate its operations, it would crystalize that it is trading at a very high cash flow yield. Recent competitive changes in the Spanish telecommunication market might also help to make this value more visible. And it has the hidden option of normalizing its service prices from the current, very discounted levels when DIGI achieves its optimal market position.
Speaking about sectors, we still like financials for the reasons discussed below.
Valdur (Avaron Asset Management): Our core holdings in the region have remained rather stable over the past 12-18 months. Maybe the most interesting in terms of return potential is NLB Group despite the strong stock performance (ca 50%) over the past 12 months we still see quite significant re-rating potential and growth (or capital return) opportunities for the banking group. However, with the potential downward rate cycle starting the appetite towards the sector in general might peter out. In Romania, it is worth pointing out Yum master franchisee Sphera Group which is gradually restructuring its activities and restoring margins after the elevated cost pressure period we have witnessed. Again, the stock has rallied a lot since the beginning of 2023 but if the fundamental trajectory continues, we expect the fair value to be even higher. However, the corporate governance of the company is somewhat subpar, so one has to definitely account for that as well. Digi Communications is also a rather interesting small-cap story in the otherwise boring telecom sector. The company could potentially deliver quite a nice shareholder value uplift as a disruptor in the recently entered markets of Portugal and Belgium.
Mehis (Trigon Asset Management): In 2023 Trigon New Europe fund managed to offer 46.7% return in euro terms to its investors backed by good performance in regional financials and small and mid-cap selection. In Romania, we also benefitted from utilities and energy companies. Going into 2024 we have become more selective in our Romanian, Slovenian and Croatian stock-picks. In Romania, we have lowered exposure in multiple sectors and especially in financials. We continue to like consumer-related names like Sphera Franchise Group which should continue to benefit from real disposable income growth and is less exposed to likely tax increases. In Slovenia, our favorite name continues to be NLB Bank, which is among the cheapest financial companies in the Emerging Europe region. Pharma company KRKA, our long-term favorite, has rerated a lot over the years and therefore reached the levels we deem as fair. That said, we continue to be invested in the company as we like the sector, and KRKA`s strong balance sheet and its free cash-flow distribution policy. In Croatia, we continue to like the tourism sector for its long-term potential, Valamar being our top pick in the sector. In 2023 we trimmed exposure to some of the branded food producers as they became too expensive for our taste.
You manage assets for large international institutional investors. What is your sales pitch to them? Why invest in Central and Eastern European equity markets?
Tamas (HOLD Asset Management): We have three main arguments, for why we think CEE markets are interesting for international investors. First, we are moving towards a multipolar world, where near- and friend-shoring becomes ever more important. Therefore, this region should continue to benefit from the relocation of Western-European production.
Second, the valuation of the local markets is still among the cheapest in the world, which usually leads to a decent long-term absolute return.
And finally, we think that this region has a positive sectoral bias for the upcoming period. Namely, financials are overrepresented here in the stock markets and we think the next ten years will bring higher inflation and interest rates globally than in the last decade, which is beneficial for the financial sector.
Valdur (Avaron Asset Management): At the moment the arguments why to invest in Emerging Europe are rather simple. Firstly, decent growth in the broader European context is underpinned by sizable EU funding that in turn should increase future growth potential. Secondly, the valuation is undeniably cheap both in a relative sense vis a vis to other geographies but as well compared to historical levels. Of course, one can argue that due to the military conflict in Ukraine, a certain geopolitical discount is required but the broader CEE index is trading at below 8x 2024 expected earnings, and 1.2x P/B, which is almost 50% discount the rest of Europe. This seems to us unjustified, especially as the ROE expectations are almost similar, while the dividend yield for CEE is 50% higher at around 5%.
Mehis (Trigon Asset Management): Trigon Asset Management manages today close to EUR 1 bn of assets in listed Emerging Europe equities. Our investors tend to like the long-term GDP convergence story and lower leverage of the region compared to Western European countries and companies. Organic sales growth outlook in many sectors still exceeds Western Europe by multiple times, and valuation levels at which you can get exposure to these sectors, offer 20-30% discount compared to historical averages. Despite the strong performance in 2023, equities in Emerging Europe remain among the cheapest in the world.
*Views & thoughts expressed in the text should not be interpreted in any way as investment advice or recommendation. The purpose of this article is purely educational.
