East Capital Balkans

In the last quarter of 2024, East Capital Balkans fund was down 2.6%, but ended the year with an impressive 20.3% gain, significantly outperforming emerging markets. We saw strong divergence in our markets; with Austrian banks generating 12.3% returns and Turkish holdings up 8%, against a declining market, while Romania and Greece had a sluggish quarter, down 9% and 7% respectively. 

Our ability to outperform the market this quarter stemmed from a shift toward a more unique portfolio composition, incorporating a greater number of off-benchmark holdings and select short-dated Turkish lira-denominated fixed-income instruments. The sluggish performance in Greece was attributed to the EUR 5bn of placements over 12 months, which diverted attention from other stocks, while Romania struggled due to political instability and a weaker economic outlook. Romania’s large manufacturing base - closely tied to the German automotive value chain - faces potential challenges from the prospect of Trump-era tariffs on European exports.  

In Türkiye, the impressive rally in the first half of 2024 corrected in Q3 and recovered slightly in Q4. Our Turkish holdings however, recovered strongly in the quarter, up 8%, ending the year with a strong 31% performance. Our fund’s Turkish holdings now look very different than at the beginning of the year, as we have more exposure to off-benchmark investment cases, as well as a 10.8% exposure to short-dated Turkish lira-denominated bonds, which performed 11% after locking in annualised yields significantly above 40%. While Turkish fundamentals remain within the disinflation trajectory, the slower-than-expected pace of inflation decline has softened market conditions. Both retail and foreign investors are waiting for inflation to fall materially before re-entering, meaning that we are more selective with the stocks we hold. Our top-performing stock was Hepsiburada, up 40% after Kazakhstan’s Kaspi announced that it had acquired a controlling stake. Hepsiburada is the second-largest e-commerce player in Türkiye and is valued at a 90% to 79% discount on emerging market peers, which is what attracted us to the stock in the first place. We also added Logo Yazilim to our portfolio, which gained 23% in the quarter. Logo is the leading ERP software provider for upper-medium-sized companies and second in Türkiye only to German SAP, over which they have a significant price advantage. Their strong suite of products allows them to market their products through a network of distributors across Türkiye, meaning that the company can compound revenues. Furthermore, their track record in compounding revenues is excellent, with 12% CAGR in the past 10 years and 15% CAGR in the past 5 years. In the past 2 years, they have struggled with the sky-high inflation, and their stock de-rated from a 5-year average 7x EV/EBITDA to 4.5x. In 2024, the company was able to demonstrate improving cash flow metrics, which we believe will turn towards positive free cash, with greater macroeconomic stability, leading in turn to a strong re-rating.

The outlook for Türkiye as an investment destination was brightening at the end of the quarter thanks to a moderate increase in the minimum wage of 30%, which is the first step the government has taken to break the wage-inflation cycle. In 2024, the government increased minimum wages by 50%, leading to CPI ending up at 44%, and this 30% increase this year is a strong signal that we will see CPI fall below 30%. East Capital was one of the few emerging market specialists that continued to invest in Türkiye despite the challenges, because we believed in the turnaround story early and found many high-quality and good-value companies. Now, it is more difficult to find companies at highly discounted valuations but if inflation falls back into the 10%s, Türkiye may become a country where we make long-term investments to take advantage of stable growth. 

In Romania, the quarter was characterised by the chaotic presidential and parliamentary elections, which created market volatility, with the market declining by 9%. Both elections ended with more uncertainty - the presidential election was cancelled and pushed for a re-run in March 2025, and no government has formed yet following the parliamentary elections. In the end, however the government ends up being formed, it is likely to be a centrist government that will not derail the current set of economic policies. The main items on the government’s agenda are to decrease the primary budget deficit from over 8% of GDP, expected for 2024, towards 3% over several years, and to maximise the absorption of EU funds, in which they are lagging. We remain optimistic on both. We have also seen downgrades for Romanian GDP forecasts for 2024, towards 1.4% from 3% previously, due to the country’s large manufacturing base, part of which is in the German automotive supply chain and vulnerable to Trump tariffs. Overall, we have trimmed our exposure to the country, but still believe we hold the best investment cases there; Banca Transilvania, which is one the highest quality banks in Europe, and Medlife which is a fast-growing hospital group that consistently grows their revenues by over 20% per annum. 

Austrian banks performed strongly in Q4 2024, with Erste continuing its strong run, its stock price up 13% on the back of strong 3Q numbers and decent initial guidance for 2025. We continue to like the bank, which we believe is good quality, with an undemanding valuation of P/E 7.5x, P/B 1.1x, ROE 15% for 2025, offering almost 8% shareholder remuneration (dividend plus share buyback). During the quarter, we also added Raiffeisen, whose stock price is up 1.2%, as we believe it can benefit in the case of an end to the war in Ukraine or any ceasefire, with potentially less pressure related to Russian exposure from regulators and/or an easier path to disposal of Russian operations. The company (ex-Russia) is attractively valued, as it trades at 4x P/E, 0.45x P/BV, with 12% ROE for 2025, and we see potential for rerating.

In conclusion, 2024 was an eventful year, during which we consistently outperformed the market through active portfolio management and opportunistic rotation into new investment opportunities. The region remains vibrant, and we are optimistic about key developments in 2025, including the Balkans outpacing the rest of Europe in GDP growth, Greek banks offering the highest shareholder remuneration relative to stock prices among European banks, and a substantial 15–20% decline in inflation in Türkiye, which is likely to attract foreign investors.

We remain optimistic and continue to look for the best selection of high-quality stocks, with growth and strong balance sheets, as our East Capital Balkan fund is trading at an undemanding 7.8x P/E for 2025, offering 4.3% dividend yield.

Performance in USD net of fees.

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