• Homepage
• About Us
• Our Team
• Equity Funds
  • Emerging Europe Small Cap Fund
  • UIS Avaron Emerging Europe
  • Fund performance
  • Monthly Comment
  • Documents
  • How to invest
• Asset Allocation
• Careers
• Contacts

Monthly overview

July offered some consolation for equity investors after the late spring/early summer correction as the markets posted notable gains. The overall sentiment change was largely driven by the start of Q2 earnings season, which brought expectedly rather solid earnings reports and managed to curtain the macro worries that had been dominating for a couple of months. In Emerging Europe equities rallied alongside with global markets, only less liquid markets posting negative gains.

Performance of Avaron funds:
Avaron Emerging Europe Small Cap Fund B unit: +7.0% in July, +8.7% YTD
UIS Avaron Emerging Europe I unit: +7.6% in July, +6.8% YTD

On July 8^th we carried out merger of Avaron Balkan Fund into Avaron Emerging Europe Small Cap Fund. The assets of Avaron Emerging Europe Small Cap Fund increased to €29.8m (37% contribution from Balkan Fund NAV). The merger was carried out successfully and with no complications. As the merger was pre-planned for three months, no major changes were carried out in the merged portfolio in July.

We expect the second quarter earnings season that kicked off in Emerging Europe during the last week of July to become the main driver of investor sentiment for August. Overall we expect the second quarter reports to be largely equity market supportive as margins should continue to improve and/or stay at healthy levels. Recent strong run in banking sector earnings should be more or less over as without a significant improvement in asset quality, which is unlikely, the banks lack an earnings driver. Regional oils should deliver strong earnings on improving refining margins despite the fact that oil price in the second quarter was volatile, downstream focused companies outperforming upstream biased names. Pharmaceuticals are expected to report more or less in line, while telecoms' reports delivered on average were slightly sluggish. Weaker regional currencies should support the earnings of Hungarian pharmaceuticals. Among our regional small cap universe we expect the outperformance of export driven companies to continue alongside with steady improvements in consumer cyclicals.

The positive price performance of our largest equity holding, the Polish telecom incumbent TPSA, was driven by positive surprise in the quarterly figures and the regulator's nod to the new pricelist in broadband segment. Second quarter brought a strong turnaround in the mobile division where EBITDA jumped 22% compared to the previous quarter on limited churn, higher post-paid average revenue per client and growing traffic. This allowed consolidated EBIT to cease its yoy declines first time since mid-2008. The company increased its net free cash flow guidance for this year from PLN 2bn to 2.3bn, which fully comforts the ongoing dividend policy. TPSA just paid a hefty dividend. After the dividend payment the company is still attractively valued, trading at 9.2% dividend yield and 4.2x EV/EBITDA.

While the macro outlook for Romania and Bulgaria has deteriorated during the last months, positive news flow from the Baltics and Turkey continues. The Baltics are posting growing GDP growth figures again with Lithuania showing off with 1.1% year-over-year growth in the second quarter and a whopping 2.9% quarter on quarter on seasonally adjusted basis. As expected the recovery is based on the growth of exporting industries, whereas domestic consumption is still weak.

On July 13 Estonia's entry to the euro area was formally approved by Ecofin Council. After the decision rating agencies upgraded Estonia's ratings, saying that joining the euro area improves Estonia's risk profile as it reduces the risks associated with country's sizeable external debt and foreign currency in the domestic banking system, and gives its banks access to European Central Bank liquidity facilities.

Valuations in Emerging Europe are appealing, both on absolute and relative basis. Emerging Europe trades at 35% discount to global emerging markets on P/B basis. Companies in Avaron Emerging Europe Small Cap Fund trade at 1.0x book value, 3.8x 2011E EV/EBITDA and offer on average 4.2% dividend yield. Overall we are delighted with valuation levels and better than expected results, which are showing continuous improvement, delivered by our portfolio companies. At the same time we are facing increased external macro risks, namely uninspiring global macro data pointing to slowing growth across the globe. Therefore, we decided to make little changes to our portfolios in July and did not increase the cyclical exposure of the portfolios for the time being. Our portfolios continue to be balanced between high-yielding and strong balance sheet telecoms, pharmaceuticals and energy (37% of portfolio) and high-yielding bonds (9% of portfolio) combined with higher risk-taking among exporters, consumer cyclicals and banks (31% of portfolio) and privatisation funds and real estate companies (14% of portfolio).