Development of the fund Raiffeisen-Zentraleuropa-ESG-Aktien

We asked András Szalkai, fund manager for Raiffeisen-Zentraleuropa-ESG-Aktien about the development of the fund.

The Raiffeisen-Zentraleuropa-ESG-Aktien also benefited greatly from this new momentum with an increase of 25.95% (net) in the last 12 months (as at the end of February 2024) – although the war in Ukraine still hangs over the region like a sword of Damocles, regrets fund manager András Szalkai.

Without the war in Ukraine, Raiffeisen-Zentraleuropa-ESG-Aktien would probably not even exist. How did this fund emerge?

András Szalkai: The fund emerged from the former Raiffeisen-Osteuropa-Aktien, which we had to close immediately after the outbreak of the war due to the sanctions because of its high exposure to Russia, around 50 per cent.  And since there was still no end to the war in sight in April 2023, we decided to split off the Russia part of the fund and reopen the remaining part, thereby making it tradable. Naturally, we continued to manage the fund in a closed position and took advantage of buying opportunities in other tradable markets such as Turkey, Poland and the Czech Republic.

But it didn't stop at the split, the fund not only got a new name, but was also reorganized.

Yes, on the one hand we have aligned the management of the fund with ESG* criteria and on the other hand we have also redefined the markets in which it can invest, with a focus on Central Europe. Specifically, we have of course removed Russia from the investment universe, as well as Turkey and Greece. Instead, we have added Austria.

Why was this change made?

Our primary aim was to remove volatility and reduce the fund's risks. However, we have also changed the fund's strategy: For example, we also buy global shares of companies that operate disproportionately (minimum 20 - 30 %) in the region but are not necessarily listed on the local stock exchanges. The investment universe in this segment comprises around 150 stocks. In principle, we invest from the Baltic Sea to the Adriatic and the Black Sea. The Baltic states also play a role here, as do the markets of Poland, the Czech Republic, Hungary and Austria. But we also look at stocks from Slovenia and Croatia and, of course, Romania and Bulgaria.

The fund is now responsibly orientated in terms of ESG. What does this mean for the selection of investable equities?

This focus means that slightly more than 100 of the 150 or so companies have been removed because they do not meet our requirements for responsibility. However, with around 150 stocks, we still have a very large selection from which we ultimately invest in the 50 most promising stocks.

What role do global equities play?

Initially, the proportion of global equities from companies operating in Central Europe was around 20 per cent. This proportion is currently somewhat lower, as we have increased our investments in Poland. The parliamentary elections have played into our hands here. The new government in Poland is seen by the markets as much more market-friendly and the Warsaw stock exchange reacted with extremely sharp rises before and after the election. We have therefore reduced around half of the global investments in the fund and reinvested in Poland. The developments in Poland and the recovery of the stock market have spread to the entire region and the fund has benefited greatly from this. Over the past 12 months, as at the end of February 2024, the fund has gained 25.95% net.

Can you give us an example of a Polish company in which you are invested?

One example is INPost SA, a Polish company listed in the Netherlands that operates in the field of automated mailboxes. Deliveries can be collected from pick-up stations securely and at any time. Notifications are sent via SMS or e-mail. The company is very successful in Poland and the services are also to be rolled out in other European countries such as France and the UK. We also like the fact that the company scores highly when it comes to sustainability, as this saves CO2.

Apart from Poland, have there been any other important developments that are or were relevant for investors in the region?

A major IPO** in Romania worth around two billion US dollars can certainly be categorised as such. The company, a hydropower plant that originally belonged to the state, is called Hidroelectrica, it produces green energy and is economically well positioned. The IPO was not only a major event by Eastern European standards, but also attracted global investors. The company is performing very strongly and also offers a dividend yield of 9 %. This company is one of the top positions in the fund and has also driven performance. Of course, past performance says nothing about future developments, but we are very confident that there is still further potential here.

Inflation, interest rates and geopolitics are currently driving the markets. What are your expectations for Raiffeisen-Zentraleuropa-ESG-Aktien in this respect?

The expectation in the market is that the major central banks will lower interest rates again. And the local central banks will also follow suit. In some countries, the central banks have already started to cut interest rates because inflation is falling very sharply globally, but also in Central Europe. If the Fed and the ECB start cutting interest rates, this would be very positive for equities and would certainly give prices a noticeable boost - but probably not until the second half of the year. The average valuation of Central European equities is still 20 to 30 % below historical average valuations. There is still great potential. And when interest rates normalize again, this discount will narrow. Of course, it is not just about valuation levels, but also about growth - both of the companies themselves and of the economy.

And what are the forecasts for economic growth in the region?

Quite good. Last year, it averaged zero. This year, growth is expected to be between 2 and 3 % and the forecast for 2025 is heading towards 3 %. After all, that is double or triple what is forecast for Western Europe. This means that there is also support from this side and the prospect of higher profits for companies. We assume that this will also support the banking sector in particular, which we take into account very strongly in the fund with a total share of around 40 to 50 %.

In recent years, high energy prices have dominated the development of many companies. Prices have now stabilised again and security of supply appears to be assured. Is this still an issue?

Absolutely! The development of energy prices remains a very important factor for the whole of Europe and is also essential for companies. The current sharp fall in natural gas prices is driving down inflation and this has strong implications for the equity markets. For some energy companies, the profits we have seen will fall sharply. Others, however, especially industrial companies that have suffered greatly, can now recover. In fund management, we now have the opportunity to actively enter the markets and reallocate accordingly. This is driving the fund's relative performance, especially because as an ESG investor we do not invest in all available companies, such as those from the nuclear sector. We therefore add to positions that benefit from this trend, for example because they have high energy requirements and can now produce more cheaply. Wienerberger is a good example of this. The company will also benefit greatly from lower interest rates, as these should lead to a revival in the property sector.

What risks are investors confronted with?

In addition to the market risks that apply to capital market investments, these are primarily geopolitical risks, in particular of course the war in Ukraine, which hangs over the region like a sword of Damocles and is also associated with major risks for the rest of the world. If the worst can be averted and, ideally, the war ended, the region would benefit enormously - not only from the lower risks, but also from the potential for development.

* Sustainable finance, in the sense of the EU Green Deal, refers to the process of taking environmental, social and governance (ESG) considerations into account when making investment decisions in the financial sector, which leads to more long-term investments in sustainable economic activities and projects.

** IPO is the abbreviation for Initial Public Offering. In short, an IPO is an initial public offering of a company. By means of an IPO, investors can acquire shares in a company that was not previously listed on the stock exchange.

The fund Raiffeisen-Zentraleuropa-ESG-Aktien exhibits elevated volatility, meaning that unit prices can move significantly higher or lower in short periods of time, and it is not possible to rule out loss of capital.