credit suisse asset management limited investing in eastern europe april 2008 elizabeth eaton,...

CREDIT SUISSE ASSET MANAGEMENT LIMITED

Investing in Eastern EuropeApril 2008

Elizabeth Eaton, Senior Portfolio Manager

Asset Management

Eastern Europe & RussiaApril 2008

Slide 2

Emerging Markets in a Global Context

Despite dominating global growth and population, Emerging Markets continue to have disproportionately low levels of GDP and market capitalization

From a “big picture” view, there remains massive opportunity for investors in emerging markets

Developed Versus Emerging Markets, 2007E

20

74 76

80

26 24

0

20

40

60

80

100

Population GDP Market Cap

Developed Markets Emerging Markets

Source: National Statistical Services, ING Estimates

Emerging Market Contribution to Global Growth

42 4733

58 5367

0

20

40

60

80

100

2006 2007E 2008E

Developed Markets Emerging Markets

Eastern Europe provides unique opportunities within a GEM context

Anchor of European Union Membership – lowers long term economic risk and provides funding for development

Commodity exposure – growth area for both oil & gas and metal & mining

Advanced labor force and competitive tax rates

Close proximity to major export markets of the European Union

Asset Management


Slide 3

Eastern Europe – the Big Picture Population (mln)

0

100

200

300

400

500

600

Eur

ope

EU

15

Rus

sia

CIS

x-

Rus

sia

EU

+20

04

EU

+20

07

Bal

kans

Source: IMF, ING Estimates

The bulk of regional population is in Russia and other CIS countries, including Ukraine and Kazakhstan.

The overall economy of the region remains only one-fifth of that in Western Europe (EU 15).

Despite rapid convergence, GDP per capita still averages only 17% of the EU 15. Even the 2004 enlargement countries still have only one third the GDP of the EU 15.

There remains a great deal of “catch up” potential across the region.

GDP/Capita US$

0

10,000

20,000

30,000

40,000

Eur

ope

EU

+20

04

Rus

sia

EU

+20

07

Bal

kans

CIS

x-

Rus

sia

GDP (US$ bln)

0

2500

5000

7500

10000

12500

15000

EU 15 EM Europe

Asset Management


Slide 4

Economic Snapshot

2007 2008 2009 2007 2008 2009 2007 2008 2007 2008 2007 2008

Czech 5.9 4.4 4.2 4.8 5.9 3.3 -3.5 -3.0 -3.3 -4.6 33.5 33.5

Hungary 1.3 1.8 3.0 7.1 4.5 3.4 -6.1 -4.0 -5.3 -3.9 24.6 24.6

Poland 6.6 5.3 5.0 3.7 3.5 3.0 -2.5 -3.1 -4.2 -6.1 61.3 62.3

Romania 6.0 6.0 6.0 7.0 4.8 4.5 -2.5 -3.0 -13.4 -14.2 26.0 26.0

Kazakhstan 9.0 5.0 5.0 19.0 12.0 8.5 -2.2 -1.4 -2.5 -2.0 19.0 19.0

Russia 7.3 7.0 6.5 11.7 10.0 8.0 6.5 4.2 6.2 4.7 461.8 563.6

Ukraine 7.0 6.5 5.5 14.5 10.0 8.0 -3.8 -5.6 -4.3 -8.0 33.7 44.2

(USD bln)Nom. Fiscal Balance Current Account International Reserves

GDP (%yoy) Consumer Price Inflation (% of GDP) (% of GDP)

Economic outlook across the broad region remains strong.

Growth is in excess of 4% across markets, with the exception of Hungary where fiscal cutbacks continue to cause pain. On average, the region is expected to grow at 5.1% in 2008 versus 6.3% in 2007.

While a global slowdown could result in reduced exports, countries across the region are experiencing buoyant dometic demand which should leave them relatively insulated from any pullback.

Inflation pressure is likely to intensify in the region, with exposure to energy and tightening labor markets.

Interest rates are likely to rise in most markets, except Hungary where progress will be slow.

Source: Goldman Sachs estimates, Credit Suisse

Asset Management


Slide 5

Domestic Drivers Increasingly Important and Stock Selection is Key

Then

Improving macroeconomics

– Convergence process

– Russia’s recovery from 1998 crisis

Rising Commodity Prices

Very low valuation

Growing investor interest in the region

– Eastern Europe had historically been ignored as a distinct asset class

Now

Financials -- credit expansion across the region

Infrastructure -- public and private sector investment

Consumer – domestic demand is growing

Natural Resouces – remain a global force

Remaining undervalued assets

Bottom up delivery on investment performance supports valuation

But supported by

– Range bound commodity prices

– Stable macroeconomics & politics

Asset Management


Slide 6

Financials: Loan Penetration Remains Low

Households were unable to be indebted prior to the 1990s

Low level of product sophistication in retail – compared to both developed and emerging markets

Basic financial products, like credit cards and mortgage loans, are still being introduced

Deepening financial intermediation will provide strength not only to the banking sector itself, but through to domestic economies through consumption and investment as well

Loans to GDP (%) 2007E

0

25

50

75

100

125

150

175

200

HK

CN

KO TH KZ

HU

CZ ID BZ

PO

RU

Credit Card Penetration (% of Population)

0

20

40

60

80

100

120

140

160

180

RU

CH

PO

HU

MX

BZ

TU KO

Source: Credit Suisse, UBS Estimates

Asset Management


Slide 7

Financials: Eastern Europe in the current context

Many Eastern European banks continue to be funded through deposits and do not need to tap into the credit market to continue high levels of loan growth

– Kazakh banks, in general, are an exception

– Maintaining high levels of deposit growth will be key

Loan growth remains high, although we expect lower levels in 2008

– Focus continues to be on retail and consumer loans

Loan to Deposit Ratio, 2007

0

50

100

150

200

250

300

350

Kom

ercn

i

Pek

ao

PKO

Sbe

rban

k

OTP

Hal

yk

VTB

KKB

Alli

ance

Source: Credit Suissee Estimates

Loan Growth, 2007

0

5

10

15

20

25

30

35

40

45

50

55

Kom

ercn

i

Pek

ao

PKO

Sbe

rban

k

OTP

Hal

yk

VTB

KKB

Alli

ance

Asset Management


Slide 8

Financials: Sector View and Focus

Sector Drivers Credit penetration remains low across

the region Earnings growth remains relatively

high, albeit lower than in 2007 Retail products offer highest margins

Banks focused on SMEs, mortgage loans, small consumer loans, and credit cards

Watch the macro – how will rising inflation and interest rates effect the sector?

No direct sub prime exposure in Eastern European banks

Default risks remain low, despite some rise in unsecured lending

Access to capital is not yet problematic for most banks (Kazakhstan is the exception)

Foreign banks Could strategic holdings be reduced

in Central Europe? M&A in Russia likely to support

valuation

Stock Selection

Focus on growth in under saturated markets across the region

Poland – large cap banks with cross-selling opportunities; smaller, innovative banks looking at niche markets

Russia – highly favorable macro outlook combined with bottom-up structural growth in several products

Value plays

Hungarian banks look inexpensive, despite being very well managed

Kazakhstan will likely be ignored by risk-averse investors, despite rock bottom valuation

Avoid Romania

Asset Management


Slide 9

Infrastructure: A Growing Sector

Macro Drivers

Decades of under-investment

Urbanisation

Population growth

Bottlenecks to economic growth

Funding availability and new financing models

*Source: GE & Merrill Lynch

Asset Management


Slide 10

Infrastructure: Expected Spending

China ($400bn): Energy, transport, environment, Olympics, real estate

Russia ($250bn): Export facilities, pipelineand ports, housing

Gulf Region ($150bn): Real estate, water

India ($110bn): Roads, ports, oil and gas

Brazil ($100bn): Power generation and transmission, telecoms and transport

South Africa ($60bn): Electricity generation, rail freight,

road works related to 2010 World Cup, housing

Indonesia ($45bn): Roads, power generation, water treatment, oil and gas

Mexico ($60bn): Natural gas, toll roads, highwaysand airports, homebuilding

Central and Trans-European transport networkEastern Europe ($45bn):

USD1.2 trillion to be spent in emerging markets

Source: Merrill Lynch, CAIB, World Bank, IIF

Russia20%

China34%

Indonesia4%

Gulf13%

India9%

Brazil8%

Mexico5%

South Africa5%

CEE2%

Asset Management


Slide 11

Infrastructure: Central and Eastern Europe

Source: UN Economic Commission for Europe

Infrastructure spending in Central and Eastern Europe is likely to be dominated by the Trans-European Network for Transport, which aims to connect the CEE with Western Europe’s motorways, rail lines and waterways. The bulk of expenditure is expected to take place in Poland.

Transport financing is mostly funded by EU member states and transfers from the EU Cohesion Fund. Total fund transfers are expected to be around 3% of GDP each year through 2010.

Motorways (km/100,000 pop)

0

4

8

12

16

20

EUR

15

Croa

tia

Czec

h Re

publ

ic

Slov

akia

Ukra

ine

Bulga

ria

Turk

ey

Polan

d

Russ

ia

Hung

ary

Rom

ania

Source: CAIB

Asset Management


Slide 12

Infrastructure: Russia

Age Structure of Russia's Capital Equipment (Yrs)

0

10

20

30

40

50

1990 1995 2004

Social Infrastructure Spending to Increase (Rb bn)

0

20

40

60

80

100

Education Health Care Agriculture Housing

2006 2007F

Source: Deutsche Bank, Bloomberg

Russia has seen a steady decline in the quality of its infrastructure after years of underinvestment across most sectors.

The bulk of spending will be undertaken by state-controlled monopolies to upgrade oil pipeline and energy capacity. The Investment Fund (Rb140bn) is financing Public-Private Partnerships in road and railway infrastructure and utilities.

Housing is also getting particular attention: President Putin called for increasing new housing space to 100-130m sq m per year and setting up Rb$250bn fund to reform housing market (around 1% of GDP for next 4-5years)

Budget Balance (% of GDP)

02

46

810

1214

16

Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05

Asset Management


Slide 13

Infrastructure: Real Estate Still Compelling

Modern Office Stock per '000 Inhabitants, sqm

0

2000

4000

6000

8000

St Pet

e

Mos

cow

Bud

apes

t

War

saw

Pra

gue

Par

is

Ber

lin

Lond

on

Mortgage Loans as a % of GDP

0

20

40

60

80

100

UK

US JA CZ

HU

PO KZ

TU RU

Source: Credit Suisse, UBS Estimates

Despite global concerns, the real estate sector in Eastern Europe remains in fundamentally good condition

The main driver continues to be structural shortage of quality real estate, where demand continues to outstrip supply and vacancy rates remain at extremely low levels in most major cities

There are not yet signs overheating in the mortgage sector, where penetration levels remain at a very low levels

Commercial property yields have fallen from peak levels, but early indications show rents are once again on the rise in capital cities

Asset Management


Slide 14

Infrastructure: Sector View and Focus Sector Drivers Infrastructure spending is growing

rapidly across Eastern Europe in order to upgrade aging capital stock

Government spending In accession countries, transfers

from the EU budget are tagged for specific infrastructure related projects

In Russia, the Private spending

Oil & gas companies are now starting major greenfield expansion plans

Utility sector is undergoing restructuring and requires massive amounts of capex to expand generation

Real estate sector is in fundamentally good condition despite global concerns Lack of supply in high-end

commercial real estate keeps rents high

Availability of mortgages and higher disposable incomes will drive residential sector

Stock Selection

Real estate remains compelling

Residential continues to benefit from mortgage growth and roll out

Preference for construction oriented companies rather than real estate investment funds

Polish construction companies will benefit from EU structural funds

Investment is not only focused on end owners of infrastructure assets, but on companies contributing to sector growth

Companies that make products for the end owners (steel companies)

Intermediaries that make investment possible (developers, banks, oil service companies)

Asset Management


Slide 15

Consumer: Domestic Demand Remains High and Growing

Total Retail Turnover, Russia

0

100

200

300

400

500

600

2004

2005

2006

F

2007

F

2008

F

2009

F

2010

F

$ bl

n

Retail Turnover, non-food

Retail Turnover, food

Overall, the Emerging European retail market is expected to grow close to 20% per annum until 2008

– Russia represents the strongest area of growth, with a 50% expansion in turnover between 2004 and 2006

Increased wealth of the population means higher spending in retail

Market share opportunities exist for large players as local markets remain highly fragmented

Russia is set to be largest retail market in Europe

Source: Rosstat, Renaissance Capital Estimates

Asset Management


Slide 16

Consumer: Sector View and Focus

Sector Drivers GDP per capita across the region

averages only 17% of Western European levels

Disposable income continues to rise at a steady pace Lower levels of unemployment Higher and wages (and growing) Regulated prices have kept some

costs low, such as electricity and gas

A broad range of consumers now have access to credit through the banking system Mortgage loans Credit cards Small consumer/home improvement

loans Retail trade is becoming formalized –

turnover is rising in modern format stores at the expense of open markets

An element of “trapped demand” remains in some areas where imported products were once scarce

Stock Selection Despite several recent listings,

consumer stocks remain under-represented in regional indices

There are virtually no pure consumer oriented stocks in either Hungary or Czech Republic

Poland Most consumer stocks are both

illiquid and expensive Prefer industry leaders and

established local brands with strong management teams

Use sell-offs as an opportunity Russia

Food retailers remain the most liquid and accessible part of the market – focus on companies with successful region roll-out strategies

Watch for impact of raw material costs

Asset Management


Slide 17

The world is resource short

Not finding enough additional resources

Demand continues to grow in emerging markets, secular and cyclical growth

Not enough development and service capacity – people and machines

Oil: non-Opec decline rates are accelerating

Slow supply side reaction

More difficult to produce and mainly non-conventional

Deeper and more complex horizons

Oil sands: expensive, new technology, environment

High technology intensity in enhanced oil recovery and heavy oil

High oil prices are a reality

Marginal cost of production at above $55-60/bl

Low spare capacity – unlikely to go – geopolitical threats likely to remain

Resources controlled by unstable regimes

Natural Resources: Key Beliefs

Asset Management


Slide 18

Natural Resources: A Global Force

Russia and Central Asia represent a significant portion of global production and reserves in several major commodity items

World’s largest producer of hydrocarbons

Large and growing base metals resource

Portion of global reserves in many commodity items is much, much higher

China and Greater Asia are growing consumers of CIS commodities – “Russian bear feeds Chinese dragon”

Russia as a % of World Production

12

21

11

3

21

6

13

48

128

4

9

22

7

18

8

0

10

20

30

40

50

Oil

Nat

ural

Gas

Alu

min

ium

Cop

per

Nic

kel

Ste

el

Pla

tinum

Pal

ladi

um

Ther

mal

Coa

l

Cok

ing

Coa

l

Chr

ome

Cob

alt

Dia

mon

ds

Mol

ybde

num

Pot

ash

Ura

nium

(%)

Source: GFMS Metals Consulting, IISI, Johnson Matthey, ABARE, BHP Billiton, Rio Tinto, Commodities Research Unit, USGS, World Nuclear Assoc.

Asset Management


Slide 19

Russian Oil & Gas: What can the Prime Minister Do?

Gazprom has always been the most leveraged Russian company, due to high taxation in the oil sector Russian integrated oil companies have been burdened by two main taxes

Crude export tax Mineral Extraction Tax (MET)

Government is slowly making changes in taxation to support future investment growth in the industry

– No tax for development in Eastern Siberian basin (since 2007)

– On the table: tax exempt development in Timan-Pechora (Lukoil), reduction in MET, sliding scale for domestic oil products

– Putin has generated full support from the president and relevant ministries, and claims the bill is ready for the Duma

Russian Oil Stocks, price performance YTD

50

60

70

80

90

100

110

120

130

140

150

08/0

1/20

08

22/0

1/20

08

05/0

2/20

08

19/0

2/20

08

04/0

3/20

08

18/0

3/20

08

01/0

4/20

08

15/0

4/20

08

29/0

4/20

08

13/0

5/20

08

Lukoil Novatek Gazprom Roseneft Surgut

Asset Management


Slide 20

Natural Resources: Sector View and Focus

Sector Drivers Oil price continues to surprise on the

upside Sell-side analysts are slow to

upgrade estimates and many remain “behind the curve” in 2007 – expect further revisions in 2008

Pricing in base metals will likely be volatile, but medium-term demand continues to outstrip supply Project delays and problems

damage supply side picture Demand from BRICs continue to

grow Cost of greenfield projects remains

high and high quality equipment is in shortage

M&A activity could be a catalyst in Russia and other CIS countries where companies remain relatively inexpensive and development potential remains high

Changes in taxation in the Russian oil & gas sector could be a catalyst, but is unlikely in the near term

Stock Selection Russian oil & gas

Integrated oil companies have been ignored despite high crude prices –changes in taxes are imminent

Prefer companies associated with local governments as they are likely to benefit from new licensing opportunities

Metals & Mining Russian metals companies remain

some of the cheapest in the world despite world-class resource bases

Expect political clarity to result in multiple expansion

Asset Management


Slide 21

Other Industries

Telecoms

Fixed line telecoms are now x-growth in most areas – optimization of balance sheets and high dividends will be drivers as businesses have reached maturity

Mobile companies still riding the wave of upgrades in ARPU over 2007

Broadband is growing rapidly across the region – Russian companies remain compelling

Media

Advertising penetration remains low across the Eastern European region and is a growth area

Listed companies have disappointed as competition has increased over time

Downstream oil

While refining margins are expected to be lower in 2008 than in 2007, we still find stock specific ideas in the industry

Refinery upgrades in Poland and Lithuania should provide a catalyst

Utilities

Electricity prices and acquisitions should fuel earnings growth in Central Europe

In Russia, sector restructuring has been a major driver

Government has now approved all major sector reforms

Demand for electricity is increasing and generation capacity must be built to fulfill future needs

Asset Management


Slide 22

Where are the risks?

Risks remain largely externally driven

Global growth and commodity prices

Risk aversion and change in global sentiment

Inflation

High inflation in Russia appears to be one of the few economic vulnerabilities

Current accounts stretched in some convergence countries

Can this be covered with FDI?

Hungary also suffers from large fiscal deficit

Asset Management


Slide 23

Eastern European Investment Team

Team Member Functional Title Location

Neil Gregson

Head of Emerging Market Equity, Global

Resources London

Elizabeth Eaton

Head of Emerging Europe, Middle East and

Africa London

Renata Klita Portfolio Manager, Eastern Europe London

Gregg Bridger Assistant Portfolio Manager, Eastern Europe London

Jacqueline de Sanctis

Client Portfolio Manager, Emerging Market

Equities Zurich

Vipin Ahuja Global Sector Portfolio Manager, Energy London

Anne Marieke

Ezendam

Global Sector Portfolio Manager, Health

Care/Pharma London

Simon Sheppard Global Sector Portfolio Manager, Metals & MiningLondon

Stephen Parr Global Sector Portfolio Manager, Telecoms London

Krisztina Kozma Portfolio Manager, Hungary Budapest

Tomasz Adamus Portfolio Manager, Poland Warsaw

Stanislaw Ozga Portfolio Manager, Poland Warsaw

Marcin Dabrowski Trader, Poland Warsaw

Petr Holinsky Portfolio Manager, Czech Republic Prague

Annabel Betz

Economist & Strategist, Global Emerging Market

Equity London

Asset Management


Slide 24

On the ground, Bottom-Up Security Selection adds Value

Asset Management


Slide 25

-13.4

16.9

40.8

67.5

29.9

44.0

-5.2

27.2

34.7

-13.8

17.0

31.3

72.6

25.3

33.1

-3.6

25.9

31.7

-20

-10

0

10

20

30

40

50

60

70

80

YTD 2007 2006 2005 2004 2003 1 Year 3 Year (Ann) 5 Year (Ann)

Per

form

ance

(%)

CS Equity Fund (Lux) Eastern Europe

Source: Credit Suisse, data as at 30 April 2008. Inception date September 1997Gross of fees, Base Currency EUR, LO-CEQEEF5BOPP.

Please note that past performance is not necessarily a guide to the future. The value of investments can go down as well as up.

Account: Credit Suisse Equity Fund (Lux) Eastern Europe Benchmark: MSCI EM Eastern Europe 10-40 Index in Euros/Prior to 1/1/07 MSCI EM Eastern Europe Index

Gross Returns as of 30 April 2008

Asset Management


Slide 26

CS EF (Lux) Eastern Europe

Source: Credit Suisse

Country AllocationAs at 30 April 2008

Sector AllocationAs at 30 April 2008

Czech Republic

Hungary

Russia

Regional

Cash

Kazakhstan

Poland

Consumer

Financials

MaterialsHealthcare

Industrials

Telecom

Utilities

Cash

Energy

*Regional includes Romania, Georgia and Croatia

Asset Management


Slide 27

-10.2

-8.1

0.7

8.9

-14.7

-10.1

4.3

1.3

-12.98-11.28

-3.87

4.66

-20

-15

-10

-5

0

5

10

15

20

YTD 6 Mo. 1 Yr. Since Inception

Per

form

ance

(%)

CS Equity Fund (Lux) Russia Explorer

Source: Credit Suisse, data as at 30 April 2008. Inception date May 2006 Gross of fees, Base Currency EUR, LO-RUSEXP5BOPP.

Please note that past performance is not necessarily a guide to the future. The value of investments can go down as well as up.

Account: Credit Suisse Equity Fund (Lux) Russia Explorer

Benchmark 1: MSCI Russia Benchmark 2: RTS Index in Euros

No comparative benchmark exists. Russian Indices shown only for reference purposes.

Gross Returns as of 30 April 2008

Asset Management


Slide 28

CS Equity Fund (Lux) Russia Explorer

Source: Credit Suisse

Country AllocationAs at 30 April 2008

Sector AllocationAs at 30 April 2008

Russia

Cash

Kazakhstan

GeorgiaConsumer

Financials

Materials

Healthcare

Industrials

Telecom

UtilitiesCash

Energy

Asset Management


Slide 29

Important Information

This communication is directed at institutional clients only. It should not be distributed to or relied upon by private customers.

This document has been prepared and issued by CREDIT SUISSE ASSET MANAGEMENT LIMITED, One Cabot Square, London E14 4QJ, www.credit-suisse.com/uk, Tel: 020 7888 1000, on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the information is accurate and any assumptions made or simulations used are fair and reasonable, neither CREDIT SUISSE ASSET MANAGEMENT LIMITED, nor any director, officer nor employee, shall in any way be responsible for the contents. This document does not constitute investment advice and no reliance should be placed on its contents. It has been prepared for illustrative purposes only to demonstrate CREDIT SUISSE ASSET MANAGEMENT LIMITED's investment process and strategy.

The price of shares and income from them may fall as well as rise and is not guaranteed, You may not get back the amount of your original investment. Please note that past performance is not a guide to future performance. The value of investments can go down as well as up. Where investments are made internationally their values may fluctuate due to currency exchange rate movement. The yield quoted is appropriate at the time of going to print, but may fluctuate subject to market conditions.

Any research included in this document is for illustrative purposes only. It was procured for CREDIT SUISSE ASSET MANAGEMENT LIMITED for its own purposes and is no longer current. It should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment products or to adopt any investment strategy.

All forecasts are based on reasonable belief. The yields quoted in this document are appropriate at the time of going to print, but may fluctuate subject to market conditions.

CREDIT SUISSE ASSET MANAGEMENT LIMITED is authorised and regulated by the Financial Services Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS.

credit suisse asset management limited investing in eastern europe april 2008 elizabeth eaton,...

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