THE EASTERN EUROPEAN TRUST PLC
All information is at 30 SEPTEMBER
2012 and unaudited.
Performance at month end with net income reinvested
One Three One Three *Since
Month Months Year Years 30.04.09
Sterling:
Share price** 6.8% 9.9% 13.9% 19.9% 76.6%
Net asset value (undiluted)** 2.4% 7.9% 14.6% 19.0% 73.0%
MSCI EM Europe 10/40(TR) 3.1% 6.8% 14.5% 16.9% 64.1%
US Dollars:
Net asset value (undiluted 4.1% 11.1% 18.7% 20.1% 88.5%
MSCI EM Europe 10/40(TR) 4.8% 10.0% 18.7% 18.0% 78.9%
Sources: BlackRock and Standard & Poor's Micropal
* BlackRock took over the investment management of the Company
with effect from 1 May 2009.
** Net asset value and share price performance includes the
subscription share reinvestment, assuming the subscription share
entitlement was sold and the proceeds reinvested on the first day
of trading.
At month end
Net asset value - capital only: 277.66p
Net asset value*** - cum income: 283.30p
Net asset value - cum income (diluted for
subscription shares): 281.58p
Share price: 256.50p
2012 Subscription share price: 7.00p
Total assets^: £124.5m
Discount (share price to cum income NAV): 9.5%
Gross market exposure^^^: 112.3%
Net yield: n/a
Ordinary shares in issue^^: 42,687,819
Subscription shares: 8,546,454
***Includes year to date net revenue equal to 5.64p per
share.
^Total assets include current year revenue.
^^Excluding 6,000,000 shares held in treasury.
^^^ Long positions plus short positions as a percentage of net asset value.
Benchmark
Sector Analysis Net Assets(%)* Country Analysis NetAssets(%)*
Energy 41.1 Russia 65.8
Financials 28.1 Turkey 15.7
Materials 11.1 Hungary 8.7
Telecommunications 10.0 Poland 6.2
Industrials 3.6 Czech Republic 5.4
Consumer Staples 3.4 Kazakhstan 3.0
Health Care 3.1 Turkmenistan 1.6
Other 3.0 Ukraine 1.2
Information Technology 2.9 Austria 1.1
Utilities 1.8
Consumer Discretionary 0.6
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Total 108.7 Total 108.7
---------- --------
Short Positions -3.6 Short Positions -3.6
========== ========
*reflects gross market exposure from contracts for difference
(CFDs)
Ten Largest Equity Investments (in % order of Total Market
value)
Total Market
Company Country of Risk Value %
Gazprom Russia 10.9
Sberbank Russia 8.8
Lukoil Russia 8.6
Uralkali Russia 4.4
Turkiye Garanti Bankasi Turkey 4.1
OTP Hungary 3.6
Surgutneftegaz Russia 3.5
Novatek Russia 3.2
Komercni Czech Republic 2.9
Mail Ru Russia 2.7
Commenting on the markets, Sam
Vecht, representing the investment
Manager noted;
Markets
In September, global market attention was focused first on the
president of the European Central Bank (ECB), Mario Draghi, who stated that he would do
'whatever it takes to save the Euro' and then to Germany, where the high court ruled that the
European Stability Mechanism did not contravene the German
constitution. US Federal Reserve governor, Ben Bernanke, contributed to market euphoria by
announcing a third programme of quantitative easing (QE3).
The Central European Markets of Hungary and Poland were particularly strong as the
abatement of systemic risk in the European financial system buoyed
risk assets globally. The Czech
Republic was the exception, highlighting its status as a low
beta market.
Russian equities also benefited from the risk rally. In addition
to the announcement of QE3, the Russian central bank increased all
policy interest rates by 0.25% which supported the rouble. Towards
the end of September, the oil price stabilized and a number of
share placements were announced, including $5bn from dominant banking franchise, Sberbank.
This dampened the euphoria but did not prevent Russia from outperforming over the month.
Performance & Activity
In September, the Eastern European Trust returned 4.1%,
underperforming the MSCI Emerging Europe 10/40 index by 0.7% in USD
terms.
The largest detractor from performance in September was the zero
weighting in Russian oil major, Rosneft. The stock performed well
on speculation that it might acquire a stake in Russian Oil company
TNK-BP, and that it could be the main beneficiary of proposed
upstream tax improvements.
The Company had increased the allocation to Hungarian stocks and
performance benefitted as financial, OTP, outperformed on the
reduction of tail risk across Europe and energy company, MOL, was buoyed by
the rally in the oil stocks and exceptionally high refining
margins.
The strongest individual performer in September was Russian
telecom, Vimpelcom as investors were encouraged by increased
clarity with regards to the ownership structure that could help end
a distracting shareholder dispute.
The Company's portfolio opened up a new position in Rostelecom,
which provides fixed-line and internet services across Russia. Rostelecom preference shares trade at
circa 40% discount to the common stock and offer a 4.8% dividend
yield so the team took the decision to buy the preference
shares.
We also initiated a position in Russian hydro-electric producer,
Rushydro. Since 2010, earnings forecasts have been declining due to
the removal of subsidies. Earnings have now stabilized, new
capacity coming on-line will drive production growth and the stock
is trading at 7x earnings.
The Company sold the position in Russian financial, Nomos Bank
after speculation surrounding a takeover by investment bank,
Otkritie, drove the share price higher.
Outlook
Russian and Eastern European markets have significant long-term
structural advantages. They benefit from flexible and dynamic
economies with undervalued currencies and educated and skilled
workforces, allowing the countries of the region to remain
competitive in a globalized market. That said, the region has not
been immune from sentiment stemming from the problems which have
beset the eurozone. Recent action from the ECB has reduced systemic
financial risk and that has been positive for all risk assets.
In Russia, the announcement
that state-owned companies will return 25% of profits to
shareholders through dividends is positive. Private companies have
also followed suit, bringing dividend yields in Russia up to Global Emerging Market averages
of c.4% for the first time. In addition, recently announced
buybacks from companies across Russia & CIS have totalled $10bn, demonstrating that companies see value in
their own capital.
Elsewhere, macroeconomic conditions in Turkey have improved and Hungary inches ever closer to a deal with the
IMF for a stand-by agreement which will underpin the country's
fiscal position. However, the key driver of markets over the last 3
months is the fact that Emerging European stocks were exceptionally
cheap, universally disliked and widely misunderstood. As such,
minor changes in sentiment were able to have a meaningful impact on
prices.
Although we still see upside for the region, we remain mindful
of the risks which could potentially emanate from three places; US,
Europe and China.
The fortunes of global markets are still tied to varying degrees
to the fate of the US recovery which, although bumpy, is underway
as reflected in a housing market which is slowly returning to
health. A fragile recovery, by definition, could be blown off
course and that is a risk for all markets, not just those of
Emerging Europe.
A slowdown in China will affect
the demand for commodities, the prices of which impact sentiment
surrounding Russia, although this
will be positive for Turkey and
central Europe, commodity
importers. This highlights the benefit of running a regional fund,
as opposed to focussing on a single country.
While recent measures to stabilise the eurozone have been
positive, any deterioration in the crisis will have implications
for Emerging Europe despite their clear contrast to the economies
of peripheral europe. It important to remember that the economies
of Emerging European markets typically have lower government budget
deficits and lower debt burdens.
Despite the attendant risks, valuations are still attractive and
much of these risks remain reflected (and more) in the price. The
long-term outlook for Emerging Europe is bright.
17 October 2012
Latest information is available by typing www.estplc.co.uk on
the internet, "BLRKINDEX" on Reuters, "BLRK" on Bloomberg or "8800"
on Topic 3 (ICV terminal). Neither the contents of the Manager's
website nor the contents of any website accessible from hyperlinks
on the Manager's website (or any other website) is incorporated
into, or forms part of, this announcement.