East Capital Balkans

The Balkans fund experienced a slight decline of 1.39% in the third quarter of 2024. This quarter proved to be more volatile than usual, with weaknesses in Turkey largely balanced by strengths in Greece. Concerns over high interest rates impacting the corporate sector led to a sharp drop of 17.6% in the Turkish market, while Greece saw broad-based gains, with our Greek holdings gaining 10.9%.

In mid-July, market sentiment in Turkey shifted dramatically from euphoric to bearish. While our Turkish holdings declined by 17.6% in the third quarter, they still posted a solid year-to-date performance of 21%. Several factors contributed to this downturn: challenging quarterly financial reports stemming from a new hyperinflation accounting standard, high interest rates squeezing corporate profitability, retail investors shifting to deposits for better returns, and escalating tensions in the Middle East. Although we were aware of these risks, the speed of the market's decline came as a surprise. On a positive note, these negative trends may be temporary; the first interest-rate cuts are anticipated in Q4 2024 or Q1 2025, which should bolster EPS growth. Additionally, as inflation decreases from 49% in September into the 30s by Q1 2025, the effects of hyperinflation accounting on financials should lessen, while the Middle Eastern tensions and retail investor shifts are unlikely to impact fundamental company performance.

The September CPI in Turkey, typically one of the highest inflation months, printed at 3% month-on-month, much higher than the expected 2.2%. This indicates that the disinflation narrative may be drifting towards the mid-40s percent inflation rates rather than the anticipated low 40s. However, given the central bank's hawkish stance, this disinflation thesis remains intact, having only drifted, not derailed. Given that market forces and macroeconomic conditions are just as important drivers of stock performance, we have adjusted our portfolio to favour more defensive inflation-proof positions, such as Enerjisa, and highly discounted opportunities like the compounding SaaS company, Logo Yazilim.

In Greece, we increased our position during the quarter, and it now constitutes 39% of our portfolio. Overall, our Greek holdings returned 10.9%, matching the market’s performance, with contributions from a variety of sectors. The standout performer was Titan Cement, which surged by 26.6% following plans to list its US operations—accounting for 60% of EBITDA—on a US stock exchange, where cement producers have valuations of up to double those in Europe. This success has created a positive feedback loop, pushing Titan Cement’s market capitalisation above USD 2.4 billion, qualifying it for inclusion in the MSCI standard index for Greece

Macroeconomic indicators in Greece signal a continuously improving economy. GDP grew by 2.3% year-on-year in Q2 2024, bolstered by a robust tourism season, which saw revenues rise by 12% in the first half of the year. Meanwhile, unemployment improved to 9.5% in August 2024, and the government reported a primary budget surplus of 2.1% of GDP. Greece’s ability to expand its economy while simultaneously achieving budget surpluses is no small feat seen in the context of the large deficits in the larger European economies. International macroeconomic forecasters are forecasting GDP growth to settle below 2% after 2024. However, investment growth should continue to grow 4 to 6 times faster, meaning that Greek banks still provide appealing growth prospects, with valuations discounted 20-40% on Italian and Spanish peers. Furthermore, Greek banks aim to pay 40-50% of their profits as dividends from 2025 profits, meaning that dividend yields will reach between 9 and 12%. Given that dividends are unlikely to decline, the cumulative yields that an investor in Greek banks will collect over the year are outstanding. 

In Romania, our holdings increased by 2.9% over the quarter, slightly outperforming the market. However, macroeconomic vulnerabilities have become more evident. While the budget deficit has decreased to 8.3% of GDP, fiscal expansion has not spurred GDP growth, which rose only 0.8% year-on-year in Q2 2024 - well below the expected 2-3%. Despite strong consumer spending, the manufacturing sector is facing weak demand from Europe, which is weighing on GDP growth. Inflation remains the highest in the Eurozone, recorded at 5.4% in July. On a positive note, GDP suppressing fiscal consolidation is not anticipated until next year and is expected to be offset by the usage of the Recovery and Resilience Facility (RRF) funds and a rebound in European consumption. 

Looking forward, the East Capital Balkans fund provides a unique mix of growth, value and yield and we continue to see the fundamentals of the region as particularly attractive. Furthermore, in Turkey and to a lesser extent Romania, the sheer number of investable stocks and the variety of sectors have increased in the past year, so the opportunity set in the Balkans has never been better.

The Balkans fund continues trading at very attractive valuations of 5.5x 2025e EV/EBITDA and 6.2x 2025e P/E, expecting a 21% EPS growth and 20% EBITDA growth in 2025 after a strong 2024. The fund also has an attractive FCF yield of 5.1% 4.5% dividend yield expected in 2025.  

Performance in USD net of fees.

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