Oxstones Investment Club™Dear Investors!
Balkan Emerging Frontiers Fund generated 0.46% net return in November and 0.49% net return in December.
It has thus made you 15.24% EUR net return in 2013 (20.43% in USD terms) and total EUR net return of 81.35%
(91.97% in USD terms) in 41 months since it started investing.
Most stock indices in the region of former Yugoslavia ended the year in red, while Ljubljana, Zagreb and Belgrade
stock exchanges finished it with minor growth. Despite that, BEF Fund made great return for you, due to active
investment management. Unlike conventional mutual funds that act as passive portfolio investors, BEF Fund
utilizes all possible legal and other legitimate means, to minimize risk and maximize returns.
We firmly believe that very strong growth of share prices in Western Balkans is approaching, due to reasons
described below.
One of the key elements for the expected growth is a global context. Despite all the panic and pessimism in financial
markets, global stock markets are growing (though some with minor corrections) since March 2009 – for almost
five years now. Stock markets in Western Balkans that experienced deepest fall since 2007 have on the other hand
still seen no significant recovery yet. While more and more stock indices of developed and emerging markets are
close to or even above their 2007 peaks, some stock indices in region of former Yugoslavia are at only 15%
of their former values. Divergence and undervaluation of stock shares from Balkan is thus obvious and huge!
Once regional indices will rise from current 15% to just one third of their former maximums, this will represent
120% growth; when they reach half of their best past values, that will represent 233% growth; and should they return
to their 2007 levels, that would mean the incredible 566% growth. Undoubtedly, one might post many justifications
for present low valuations. These reasons might be however similar to majority of investors’ 2007 off the cuff
explanations on justifiable stock valuations and on expectations of further growth. Or their March 2009 expectations
of »global financial collapse«, while actually the large growth of global stock markets began and is (somewhere also
with intermediate corrections) still ongoing, despite all »crisis« (Greek debt crisis, Cyprus bank deposits haircut, US
budget block…) and all »end of the world« predictions.
As already discussed in our newsletters, the short term stock prices are mainly influenced by mass psychology (of
investors), mid-term price levels depend mainly on interest rates and amount of money circulating in the market
while fundamental factors play their role mainly on long term. We evaluate BEF Fund investment region to be in
transition from psychology influenced phase (general atmosphere just about everywhere is still very negative) to
phase influenced by availability of money. Although there is quite some domestic money in the region (it is just
»scared« and it is waiting aside in deposits, bonds, gold and other presumably »safe investments«), the main reason
for start of new growth in Balkan region is expansive monetary policy of largest global central banks. Thanks to
record volume of »money printing« (when more money pursue same investments, on average they get more
expansive) and extremely low interest rates in US, EU and Japan, (forcing investors to move money from deposits
and bonds to stock shares) global stock markets are growing for almost five years now, as already mentioned above.
Due to high and lasting growth of large markets some investors are already looking for additional investments by
the principle of »which investment opportunities are not yet expensive?« or »what is still inexpensive to invest in?«.
BEF Fund investment region is globally among rare to meet this condition. For this, we are certain, that what we
currently witness is just the beginning of further growth of Balkan markets. As long as money is »printed« in so far
unseen extents and with historically low interest rates, even large global or regional negative surprises would probably
cause just temporary corrections and not stock market crashes. In recent months, there were some indications of
reducing the amount of monetary stimulus in U.S. (tapering). While no substantial monetary incentives slowdown
has not even started, we believe that these threats are meaningless as far as BEF Fund investment region is
concerned, for several reasons: 1. US Federal reserves’ monetary stimulus reduction would only be very gradual,
meaning that investing in circumstances of historically very low interest rates will persist. 2. Expansionary monetary
policy is moving to Europe. So far, mainly only three major global central banks were »printing« money: US FED,
Bank of Japan and Bank of England (the latter leading to record real estate prices in London). European Central
Bank long avoided this option due to German Bundesbank opposition, but given the economic situation in most
other euro area countries, it is only a matter of time for ECB to undertake such measure. Japan used such moves
after years of deflationary crisis and positive effects on the economy showed soon. Even more in the financial
markets – funds investing in Japanese equities are at the top of most profitable investments in 2013. Japanese stock
market is the best evidence of the impact of monetary policy. 3. Market reactions to monetary policy changes take
on average three to six months on most developed markets, while effects of such change might take much longer
on smaller frontier markets, as it is investment region of BEF Fund. The effect of low interest rates and global
liquidity has been felt only slightly in the region of former Yugoslavia so far. Last wave of growth in the region also
started with a strong lag after large central banks tightened monetary policy at the time when interest rates were at
significantly higher levels than now.
The whole BEF Fund investment region is imperceptibly but surely approaching to EU membership. Croatia’s
accession to EU is a positive signal for European perspective of whole region. There will be a lot of European
and other foreign investment capital inflows into the region. Besides numerous investments into infrastructure
and general economy development, EU integration process will improve the regulation and thus legal safety for
additional investments. This will facilitate further economy growth, mergers and acquisitions, better operational
results of the companies and higher stock valuations.
For already some time now, we expect the start of privatisation wave and foreign investments in companies in the
region. In fact, small to medium sized acquisitions are already occurring in Slovenia (Ljubljanske Mlekarne, Fructal,
Etol, Savatech, Juteks, Helios…). We believe that it is not far when acquisitions of the largest companies will begin.
Slovenia simply needs the money and so do the banks in Slovenia, which are full of seized shares. There was a lot
of crediting in Slovenia (among which also many failed MBOs) in the last stock market rise until 2007, as with joining
EU Slovenia gained access to more favourable financing. The sales are therefore imminent. Other countries of
former Yugoslavia need the liquidity even more and foreign acquisitions have already started. Some of these
countries are also under pressure from International Monetary Fund and World Bank, that helped them with loans
and now they call for the privatization of state assets. EU is also pressing acceleration of privatisation process. With
more than 30 billion euros to support economic recovery in the region, European Bank for Reconstruction and
Development, World Bank and European Investment Bank will only increase the power of international financial
institutions in relation to regional governments.
Results of stress tests and recapitalization of Slovenian banks is of great importance for Slovenia, as this has greatly
reduced the uncertainty and enhanced the creditworthiness of the Slovenian banking sector. This already reflects in
much lower return on Slovenian government bonds. Bank interest rates on deposits are also lowering markedly.
As already explained above, this immense influence of low interest rates, will have a positive effect on capital
markets in coming months, first in Slovenia and then on other stock exchanges in the region. With low returns
on bank savings, more money will move to stock investing, either directly or through investment funds. Though
the prices of stocks in Slovenia are already growing, investors will eventually once again begin to look for
opportunities in the neighborhood, by principle: »What has not yet increased?« We anticipate that in countries south
of Croatia this will result in significantly higher share prices growth than in Slovenia and Croatia, due to current
lower valuations, as well as due to much lower liquidity and traffic volume on other regional stock exchanges (where
already slightly increased cash inflows would brought a sharp rise in stock valuation). We should not forget that a
decade ago (following the acquisition of pharmaceutical company Lek from Slovenia – part of Sandoz Group now
– in 2002) immense growth of Ljubljana Stock Exchange started followed by growth of other stock exchanges in
the region, even though the world was also dominated by major crisis (following the burst of dot.com bubble).
Regional countries south of Croatia are becoming extremely interesting production location for foreign investors, as
the cost of labour is already lower than in China. Together with greater productivity and flexibility, lower
transportation and production costs and additional government incentives for foreign investments great advantage
of investing in Balkans is even more obvious. It is not surprising that with the exceptions of Slovenia and Croatia,
all the countries of the former Yugoslavia emerged from the recession and has recorded positive economic growth
in 2013.
As past experiences show, once the growth starts it might soon be too late to join this opportunity. Due to
currently still low liquidity in the region, stock markets will grow by at least 50% – 100% before most potential
investors became aware of it and probably even more, before they can react. The longer the stagnation of the
market endures, the stronger will be its growth when it occurs. The history of stock markets clearly shows with
numerous examples that the longer a market persists downwards, the stronger is then its growth, when the tide
turns again.
Time to invest is now! When the Balkans will be main topic of the news headlines, it will be too late! By then we
will reap great returns for you!
Kind regards,
Balkan Emerging Frontiers Fund
www.bef-fund.com
The Fund is a Segregated Portfolio of JP SPC 5, a segregated portfolio company with limited liability.
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Tags: Balkan Emerging Frontiers Fund, balkan investments, BEF-Fund, cheap frontier market valuations, croatia, emerging markets infrastructure developments, eu eastern expansion, EU integration, frontier markets, global central bank liquidity, Serbia, Slovenia, south eastern europe