Answers from the round table, Opal’s European Alternative & Institutional Investing Summit 2010 in Monte Carlo, October 2010

1. Can you provide some background on your professional journey?

I am a ‘Finance’ professional with more than fourteen years of experience in South-Eastern Europe (SEE). I was managing an investment company and a financial advisory company for several years. I was also working seven years as financial journalist and columnist.

2. What is the investment opportunity you are pursuing? In 2010 I started managing the Balkan Emerging Frontiers Fund, which is focused on the Western Balkans – the countries of the former Yugoslavia (Slovenia, Croatia, Bosnia and Herzegovina, Serbia, Montenegro and Macedonia). It is a regulated fund with monthly liquidity. We do not have any sector bias as we do bottom-up research and investment picking. But we also keep in mind that less developed countries have much larger growth potential.
3. How do you think it compares?

The Western Balkans is a region where influences from East and West have coexisted for centuries. The northern part were for centuries part of the ‘Western world’ (Austro Hungarian empire), while the southern part were for a long time part of the Turkish Ottoman empire. There are also strong connections with Russia and other eastern countries, which is especially true for Serbia and Montenegro, but most of the area experienced mixed influences. Today 3 mayor religions are present (Catholic, Orthodox and Islam).

We believe that we are talking about the last undiscovered investment region in the heart of Europe. For instance, it is very close to Venice and Vienna (only 1 and 2 hours drive by car from the border of the region), although the level of foreign investment has been very low until now.

As Asher mentioned for MENA, the same is true for SEE – you need to have a regional presence and understanding of how the things are developing there to maximise returns for investors. With good understanding and experience we are able to mitigate most of the country’s and company’s specific risks and obstacles.

4. Basic features of your marketplace

The stock markets in the region are still very inefficient and so there are plenty of investment opportunities available to be exploited. As I was present from the start of the privatisation process and the establishment of capital markets I have excellent contacts in the region, so I am capable to quickly receive and evaluate information in order toexploit opportunities by active management.

5. Help the audience understand the risks of the opportunity.

The mayor issue in this region is low liquidity, especially to do with the current circumstances of depression and total distrust of local retail investors. But this creates a valuable window of opportunity for investors with broader perspectives, as swings of mentioned capital markets are much stronger than on Western or on larger emerging markets. As we believe that we have already left behind the worst part of the cycle, we are convinced that there is a tremendous potential in the upcoming upswing.

6. How has the market behaved post crisis?

The countries in focus are one of rare exceptions in the whole world where stock exchange indices are still very depressed (indices are at only around 10-15% of 2007’s highs). Despite the strong rebound of global stock exchanges there has not been a recovery yet in the region. Having in mind low liquidity, when the capital will start to flow back to the region, we will be able to see huge increases in stock prices. That scenario has already been experienced in the past.

7. How do foreign investors participate? Who is participating NOW?

Foreign investors are almost non-existent for the time being, with the exception of a few specialists. But as we have already experienced, when the trend turns around, a lot of them suddenly want to enter trough the small doors, causing fast increases to stock prices. They are followed by domestic retail investors, who only accelerate the upswing.

8. What have returns been like?

Despite indices in the region being almost flat this year, there are more and more opportunities to make a good return with appropriate stock picking. There are also tremendous opportunities on some government bonds (for instance a ten year government bond – YTM is currently at 16%, at the beginning of the year the YTM was at 22%). We made around 23% return YTD.

9. How is the political situation evolving?

The political situation is getting better and better. Slovenia has always been the most stabile and advanced country in the region (in the past it was called ‘the Switzerland of the East’). It is already an EU, NATO, Eurozone and OECD member.  Croatia is a member ofNATO and it is expected to close negotiations and fix the date for joining the EU in a few months time; joining the EU in 2013 at latest. In recent elections in Bosnia and Herzegovina (BIH) two weeks ago, the left-centred (non nationalist) parties in both parts of the country (as in the Muslim-Croat federation and the Serbian part) won after forming a coalition government. Due to this we can expect better cooperation among the nations in BIH. Furthermore the country is in fact an international protectorate, where stability is guaranteed by a strong presence by the international community; both in a civil sense (high international representation in organisations) and in a security sense (international military groups and police forces on the ground). Serbia, Montenegro and Macedonia have stable governments. The stability of Kosovo is also guaranteed by a strong presence by the international community; both in civil and security senses.

10. Broad themes.

All countries in the region are on different stages of EU and NATO accession.Privatization is gaining better momentum in several countries in the region. Serbia announced an international tender for selling a majority ownership stake in Telekom Srbije a few days ago and there are also plans to list/privatize a few other large state owned enterprises (Belgrade airport for instance). After forming government, Bosnia and Herzegovina is expected to continue with the privatization process of several companies (country’s largest drug producer Bosnalijek, Energoinvest – multidisciplinary engineering company and a few others). AM&A cycle is starting to gain pace in the whole region.

BIH, Serbia, Montenegro and Macedonia are starting to develop infrastructure – highways, power plants, railways, business and industrial zones etc. which will have ahuge impact on the growth in the region. They are also rich in coal and minerals and have exploited only around 30% of their huge hydro power plant potential until now.

11. What have you learnt in the last 3 years?

Not only in the last 3 years but over the last 14 years I have experienced the huge impact on economic growth and the creation of wealth that has happened as a result of Slovenia joining the EU and NATO, adopting the EURO, continuing the privatization process andM&A. The other mayor driver was development of infrastructure.

12. What would you like to do in 5 years?

I would like to use and capitalize all the experiences that I have gained in Slovenia, because I believe the whole region will go through the same process. Upcoming EU and NATO accessions will convergence economies and valuations to that of existing EU member states. All the pre- and post- accession aid will boost the economies and speed up a process of closing the gap (convergence) between the Western Balkan countries and existing EU members. Those countries still have to build a lot more infrastructure (yet this process will additionally boost their economies). Ownership in many listed companies has not yet been concentrated. Processes of acquisitions and mergers will lead to higher prices. Domestic savings in form of direct investments into equities or into funds are still very low, both in nominal as in relative (as compared to the GDP) terms. Over time more and more domestic capital (higher percentage of higher GDP) will flow to equities, meaning stronger demand for them and eventually higher valuations. That will happen predominantly because of two reasons: offers of domestic financial products are still very limited. Over time more products and better marketing will bring more and more domestic capital into the markets. The GDP will be higher so there will be more money available for portfolio and pension investments/savings.

The vast majority of regional asset managers lack the understanding of the functioning of global financial markets so they gather only regional savings. We believe that we have a good understanding of both the region and the global market. We intend to put the region on the map and become a bridge between foreign investors and the region which is probably thelast catch up story in Europe in the foreseeable future.