Go East: Eastern European stock markets convince as outperformers

Saturday, 06. February 2021

– Small investor revolution puts hedge funds on the spot –.

Right at the start of the year, a small investor revolution began, with investors conspiring through portals like Reddit and brokers like Robinhood to buy certain stocks like Gamestop, AMC Entertainment, BlackBerry and commodities like silver, where there were large short sales or short positions by hedge funds. In doing so, they even distressed large hedge funds, which were driven to the brink of bankruptcy, which is not entirely harmless for global financial markets. But cryptocurrencies like bitcoin also made a splash right at the beginning of the year.

Investors in Eastern Europe had a much more leisurely, but no less successful start to the new year, where there are always outperformance opportunities compared to the DAX. By the end of January, one third of the 30 best-performing stock markets in the world came from Eastern Europe. In Russia, however, the imprisonment of the opposition lawyer Nawalny set back the Moscow stock market, but even the Moscow stock market has good potential for recovery as oil prices rise.

Andreas Männicke also gives his new assessments on the world and Eastern stock markets in his new EastStockTV video 184, but also in his stock market letter EAST STOCK TRENDS.

Small investor revolution puts hedge funds in a bind.

Until now, it has always been the case that small investors have been surprised by the sharp fall in the prices of some shares and also commodities, with small investors becoming the plaything of large hedge funds. Now, for the first time, the reverse is true. Millions of retail investors arranged via certain portals like Reddit to buy at very favourable conditions from brokers like Robinhood especially the stocks like Gamestop and recently also commodities like silver, where there were large short sales or short positions with hedge funds. As the hedge funds are often trading with large securities loans, so buying highly leveraged, they need to cover the stocks/commodities quickly in case the position goes against them. Since some hedge funds involved now also have to repay loans in large volumes very quickly, but cannot do so easily, there may also be insolvencies among hedge funds if the collateral is not sufficient.

LTCM crisis in 1998 as a warning example of a possible super disaster.

If hedge funds as large as the one run by Long Term Capital Management in 1998, which speculated on Russian bonds, were to be hit, this could even pose a danger to the global financial system due to the chaining of loans. At the time, then Federal Reserve Chairman Greenspan had to cut interest rates and ensure that LTCM received a cash injection of USD 3.75 billion from new investors, otherwise there would have been a super disaster on the financial markets. LTCM had equity of 2.1 billion US dollars at the time. However, it had positions with a nominal value of 1.25 trillion US dollars in its portfolio. US dollars in its portfolio. Even now, large hedge funds act in a highly leveraged way with enormous securities loans. If they become irrecoverable and exceed a certain size, this can still lead to a global crash on the financial market. This time, however, it still went well, as the prices of the previous price rockets also quickly collapsed again.

Gamestop as a cautionary tale for a new generation of gamblers.

Due to the concerted behaviour of millions of small investors via portals such as Reddit and discount brokers such as Robinhood, previously relatively unknown and insignificant shares such as Gamestop, a chain of video games in the USA, increased more than twentyfold (!) in a short time from 20 to over 500 US dollars, only to collapse again to 58 US dollars. The market capitalisation of the share is now still over 4 billion euros. The spook began on 13 January, when the share was still bobbing along at 20 USD dollars on the NASDAQ. It rose to 500 US dollars on 28 January with strong price fluctuations. The second “tenbagger” since the beginning of the year is AMC Entertainment Holding, whose share price rose from a high of USD 2 to USD 20 in 1 month due to Robinhood speculators, only to collapse again by over 50 percent to below USD 10. But BlackBerry’s share price also quadrupled from €5 to €20 since the beginning of the year, only to halve again to €10.

Silver in the sights of Robinhood speculators

But not only shares, but also silver and cryptocurrencies were targeted by Robinhood speculators. With the announcement of a “silver short squeeze”, i.e. the forced covering of short positions on the silver future, the silver price rose by 13 per cent from 25.6 to 30 USD/ounce at its high on 1 February, only to fall back to the starting level of 26.4 USD/ounce. One can be curious what the Robinhood speculators will come up with next. Already last year, the Robinhood speculators – and these are always almost 5 million stock investors – mainly support the bull market in FAANG stocks, i.e. IT and high tech stocks on NASDAQ. They usually pick momentum stocks such as Tesla, which then continue to rise with unusual price jumps of up to 10 percent in one day.

However, these are always very short-term investments that are not sustainable. The wave of Robinhood speculators started in October/November 2020 and it continues. This is reminiscent of the days of the New Market in 2000 and we all know what happened to it afterwards. Certainly, Amazon, Apple & Co also reported excellent figures again, but the air is now also gradually getting thinner for these shares due to the high valuation. After all, the NASDAQ Composite Index has already risen by 8 percent since the beginning of the year. It also gained over 40 per cent last year.

Cryptocurrencies like Bitcoin and Ethereum as top performers

Since October last year, cryptocurrencies such as Bitcoin and even more so Ethereum have made very similar leaps in price, with prices more than tripling in just a few months. Since October 2020, the price of Bitcoin has risen from 10,000 to over 40,000 BTC/USD and Ethereum even from 300 to 1500 ETH/USD, i.e. five times as much. New Bitcoin or crypto millionaires are already being born here, as was the case in 2017, with Bitcoin plummeting from 20,000 to less than 5,000 BTC/USD in 2018. There are also financial products on the Bitcoin and Ethereum that any private investor can order and which are also regularly discussed in the stock market letter EAST STOCK TRENDS (www.eaststock.de).

National banks also want to introduce digital currencies.

The central banks FED and ECB and even the Russian central bank are now feverishly working on their own digital cryptocurrencies as new projects and the new US Treasury Secretary Yellen wants to take a close look at cryptocurrencies. No one knows today which of the more than 3000 cryptocurrencies will have a chance of survival later on or even be of importance in real economic life. Facebook has also wanted to launch its own cryptocurrency for a long time, although the project has not yet been completed due to regulations. The price of Ripple recently plummeted by 50 per cent because the US Securities and Exchange Commission (SEC) started an investigation. New regulations are the mortal enemy of crypto fans, because they want to remain anonymous and unrecognised. Bitcoin enjoys great popularity, especially in the darknet, where criminals are also up to mischief. But PayPal now also accepts Bitcoin as a means of payment. Bafin, on the other hand, warns of a possible total loss in the future.

Cryptocurrencies more in demand than gold.

After all, all cryptocurrencies now already have a capitalisation of over 1 trillion USD. Gold also “only” has a capitalisation of 4 to 5 trillion USD. It seems that more and more gold investors who believe in currency reform are now switching to the crypto camp. Even large capital accumulation institutions like Black Rock want to be able to invest in Bitcoin & Co.

As a result, cryptocurrencies continue to rise in value and gold lost a little of its shine and only trended slightly downwards. Since its all-time high of over 2050 USD/ounce in August 2002, the price of gold has fallen to under 1800 USD/ounce, while cryptocurrencies have multiplied over the same period. But that could change again, because gold has substance and cryptocurrencies are just a digital algorithm that someone once programmed. It is very likely that cryptocurrencies will become a mass grave at some point and only a few will remain once the central banks and finance ministers get serious.

Investors in Eastern Europe are much more leisurely than Robinhood speculators or crypto fans, who are mostly very young and inexperienced investors, but no less successful for that. Eastern European equity investors are mostly very experienced value investors with a long-term investment horizon and not short-term gamblers. But there are always outperformance opportunities in Eastern Europe, too, which is given far too little attention by the Western media.

Eastern European stock market indices as outperformers at the beginning of the year.

Since the beginning of the year until the end of January, more than one third of the 30 best-performing stock markets came from Eastern Europe. The stock markets from Bulgaria, measured on the BTX index, rose by 17 percent, from Ukraine (UTX index) by 16.8 percent, from Kazakhstan (KTX index) by 11.6 percent, from Hungary (HTX index) by 7.0 percent, from Romania (ROTX index) by 6.8 percent, from Slovenia (SBI index) by 4.3 percent, from the Czech Republic (CTX index) by 3.35 percent. From Estonia (OMX Tallin Index) by 2.6 per cent, from Croatia (Crox Index) by 2.26 per cent, from Lithuania (VILSE Index) by 1.8 per cent, and from Poland (WIG 20 Index), bringing up the rear, by 1.1 per cent. At the end of January, the DAX was still just in the red, but now it is only 2.5 per cent up, as is the Dow Jones Industrial Index with 3 per cent, so that almost all the Eastern European stock markets mentioned were able to outperform the DAX, which was not the first time.

Russian stock market suffers from Nawalny conviction and possible sanctions

The Russian stock market has also been up 10 per cent in the first two weeks of trading. as the price of crude oil rose to over $55/barrel and now to almost $60/barrel. Due to the arrest of the oppositional lawyer Nawalny, who has now been sentenced to 3.5 years in prison, and the possible sanctions of the EU and the USA, the RDX index temporarily dropped significantly from 1,600 to 1,450 index points, only to rise again to 1,520 index points and thus more than 5 per cent in euro terms. Earlier, he posted a much-publicised YouTube video in which a magnificent building on the Black Sea was attributed to Putin. Later, however, Rosenberg, a judo partner and friend, revealed himself as the owner of the luxurious property on the Black Sea.

Nordic Pipeline before the end?

Nevertheless, there were mass demonstrations and 5000 arrests of protesters, which may now lead to further sanctions by the EU and the USA, and even a construction stop of the Northern Pipeline is being discussed, which France is even demanding. But the German government is still in favour of stopping the Northern Pipeline. A construction stop would be a fiasco for the operator Gazprom. But it would also put a strain on the already very tense German-Russian relationship. Nevertheless, the Gazprom share price rose by 1.8 per cent to €4.90 on Friday.

Will the Russian vaccine Sputnik V be used in Germany after all?

On the other hand, talks are now being held on whether the Russian vaccine Sputnik V should not be bought as a supplement in Germany after all, now that its effectiveness has been confirmed by manifold tests in Great Britain. It must now be examined whether Sputnik V and other vaccines are effective against the new mutating viruses from Great Britain, South Africa and Brazil. Russia has so far managed without a second lockdown and has been able to cope with the Corona crisis economically and financially much better than many Western industrialised countries.

Since there is a lack of vaccine doses in the EU and also in Germany, at least the Sputnik V vaccine would be a way to open dialogue with Russia. This would be better than letting the thread of talks break, which Russian Foreign Minister Lavrov hinted at once before in the context of the accusations regarding Nawalny. In a formal letter, the German government demanded the release of the demonstrators and also the release of Navalny.

Greater tensions expected between USA and Russia under Biden.

Even before the ceremonial inauguration and swearing-in of the new US President Joe Biden on 19 January, the USA has issued a sanction against the Russian special ship Fortuna in order to force a construction stop. Under Joe Biden, political tensions between the USA and Russia are likely to increase. After all, Biden and Putin have already managed to agree on a nuclear disarmament treaty in a telephone conversation. However, Biden will also try to stop the construction of the Northern Pipeline.

However, Biden also announced a crackdown on Russia over the alleged cyberattacks against US agencies and US companies last year. In addition, he also called for the release of Nawalny. Putin, on the other hand, assumes that Navalny has already made contact with US intelligence. Biden calls Russia an aggressor and he will probably impose new sanctions against Russia soon. While Trump was a “sheep in wolf’s clothing”, Biden seems to be a wolf in sheep’s clothing.

Foreign policy explosive could become a threat to stock markets.

But Trump left behind several building sites with high political explosives in foreign policy, such as the conflicts with Syria, with Iran, with Venezuela, with North Korea, with Libya, with China and last but not least with Ukraine, where the USA and Russia are hostile to each other with different interests. These conflicts can all escalate again at any time and then also lead to a talking point on the stock markets. In the event of new US sanctions against Russia, the rouble is likely to weaken further, as it did last year. Last year, the euro rose by more than 30 per cent against the rouble to over 91 EUR/RUB. These high currency losses are difficult to recoup on the stock market. On the other hand, the Russian stock market has great opportunities for recovery this year if commodity prices continue to rise, and oil and gas prices in particular are very important for Russia.

Is a switch from growth to value stocks now coming?

On the other hand, there is the threat of a wave of insolvencies and, as a result, a major banking crisis if the lockdowns are prolonged too long by the mutating virus. Commerzbank has already reported a loss of almost €3 billion for 2020, and this year is unlikely to look much better.

This is the balancing act that all governments in the world must now perform: on the one hand, to effectively combat the Corona pandemic and thus also the newly mutating viruses. On the other hand, to get the economy going and avoid too high unemployment. If this succeeds worldwide, new opportunities will also open up on the Eastern European stock exchanges because of the undervaluation and higher growth.

Russian commodity stocks rally strongly.

In this case, Russian value stocks, including the large oil and gas companies such as Gazprom and LUKoil, but also other commodity stocks such as NorNickel, are likely to come back into focus, while gold stocks fell somewhat in price. The price of crude oil recently rose by almost 50 per cent from 40 to 60 USD/barrel, but copper and other industrial metals were also able to increase significantly in price, supported by a weak US dollar. For example, the “Stock of the Month” in October 2020 in the stock letter EAST STOCK TRENDS (www.eaststock.de) KGHM Polska Miedz SA from Poland has already risen by 27 percent in 1 month, but NorNickel and many Russian oil companies have also been able to increase in price by over 20 percent since 9 November.

Especially airlines like Aeroflot will experience a renaissance when international air traffic returns to normal. But let’s wait and see what surprises the next few weeks will bring. Keeping a high level of liquidity is probably not the worst advice under these difficult conditions, because new opportunities will always arise, even in undervalued stocks in Eastern Europe.

Also outperformance opportunities in Russia in the IT and gold sectors.

The Russian stock market suffered from the weak oil price and is therefore still down by more than 30 percent. But even there, tech stocks like Yandex and Mail.ru clearly outperformed, but so did gold stocks. So it was right that I started a new model portfolio only with Russian gold/silver stocks in the stock letter EAST STOCK TRENDS (www.eaststock.de) at the end of 2018, and since then it has already risen by an average of 130%. My favourite Petropavlovsk has even risen by over 400 per cent since then, but Polyus Gold, which is one of the top 10 gold producers in the world, has also risen by over 100 per cent and is still undervalued. So it is still worthwhile to look beyond the horizon to Eastern Europe! My motto therefore remains: Go East – the opportunity lies in the Corona crisis!

Inform first, then invest.
Inform yourself now in detail about the background and the development of the Ukraine/Russia crisis but also about the future recovery potential of undervalued shares from Eastern Europe. There are also new opportunities in the Baltics, Romania and Ukraine, with the respective stock indices all up in 2019. For example, some Ukrainian agricultural stocks have already more than doubled in price since 2016, and in 2018 the PFTS index was already up over 70 per cent again. Kazakhstan stocks were among the top performers in the world in 2017 (+56 per cent), but not in 2018 and not in 2019, but again in 2020/21.
In 2018, 10 stock markets from Eastern Europe were already among the best-performing stock markets in the world, all of which clearly outperformed the DAX and also the US stock market. In 2019, the Moscow Stock Exchange was once again the clear outperformer among all global stock markets, with a plus of over 46 percent in euro terms. But also the Bucharest Stock Exchange (Romania) already rose by over 32 percent in 2019. The stock markets in Southeast Europe and also in the Baltic countries remained very stable in the plus (Croatia +13 percent). Last year, 6 stock exchanges from Eastern Europe were among the 30 best-performing stock markets in the world and this year until the end of January 2021 even 12 stock exchanges from Eastern Europe, which also clearly outperformed the DAX. After the Corona crash, it is still worthwhile to take a look at Eastern Europe.
Order now a trial subscription (3 issues by e-mail for only 15 €) of the monthly stock exchange letter EAST STOCK TRENDS (EST) with another Ukraine/Russia special and a dividend special as well as with a lot of background information and new investment suggestions such as the “Stock of the Month” and lucrative certificates at www.eaststock.de, there under Stock Exchange Letter.
The last EST was published on 27 January 2020, and the old EST model portfolios have already made strong gains in 2019. The “stock of the month” from September 2018 Polyus Gold already rose by over 100 per cent and the gold stock Petropavlovsk even by over 400 per cent at the high. At the end of 2018, a new “gold” sample portfolio was opened in EST, which is already up 130 per cent, and the new December 2019 portfolio of turnaround candidates rose 47 per cent. Copper producer KGHM Polska Miedz is already up 100 per cent since December 2019, and the latest “stock of the month” TCR Group – a fast-growing fintech bank from Russia – is already up 30 per cent in 1 month So there are always new opportunities on the Eastern stock markets! My motto therefore remains: Go East!
Interview notes: The last radio interview was on 2.2.21 on Börsen Radio Networks. The next interview will be on 24.5.21 on Börsen Radio Networks. You can download the interviews now at www.eaststock.de, there under the heading “Interviews”, as well as the EastStockTV video of the same name, episode 182. By the way: have you already subscribed to the EastStockTV YouTube channel?
Also subscribe now to Andreas Männicke’s free newsletter with the latest news on the world and eastern stock markets at www.andreas-maennicke.de.

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EST Stock market letter

The stock exchanges of Central and Eastern Europe have been among the top performers among the world’s stock exchanges since 1998. In recent years in particular, many CEE stock exchanges have performed far better than the established Western stock exchanges. In 2019, for example, the Moscow Stock Exchange not only clearly outperformed the DAX and DJI, but also ranked among the 30 best-performing stock exchanges in the world.

Many investors have so far criminally neglected the CEE stock exchanges. Yet the selection of promising stocks is growing. Eastern Europe still has its future ahead of it.

Take advantage of your opportunities now!

  • analyses the most important trends on the CEE stock exchanges for you monthly on 30-60 pages.
  • looks not only at the established eastern stock exchanges, such as Moscow, Budapest, Prague and Warsaw, but also at the second-tier countries and the CIS republics
  • selects the most promising stocks for you from a fundamental and technical point of view and examines not only stocks but also other forms of investment such as funds, bonds, real estate, derivatives and certificates
  • draws attention to risks and distinguishes between conservative and speculative investment options.

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