As investors face a number of challenges, Arrash Zafari, fund manager of the New Europe Fund at Quaero Capital, highlights his firm's top stock picks this month. 

Arrash Zafari at Quaero Capital has recently underlined the benefits of investing in Polish and Greek stocks in his New Europe Fund.

Zafari runs The Quaero Capital Funds (Lux) – New Europe, which focuses on long-term capital appreciation in the Eastern European region. The investment approach is bottom up and long term, with a focus on poorly followed or understood stocks, that have exceptional return potential.

Zafari believes that the Eastern Europe region, post the exclusion of sanctions-inflicted on Russia, stands out for its potential. “Firstly, relative to both Western Europe and many other emerging market geographies, Eastern Europe has better economic fundamentals, whilst lacking the political risk increasingly prevalent elsewhere,” he told WealthBriefing. “This is combined with scant coverage from both buy and sell-side institutions, making it a haven for stock picking orientated strategies, such as Quaero Capital’s New Europe Fund.” 

Here are two of his top stock picks.

Polish utilities – Tauron (TPE PW) and Enea (ENA PW)
“The Polish utility sector was largely “un-investable,” hampered by both awful fundamentals – no growth, unfavourable regulation and poor corporate governance – combined with material exposure to both coal extraction and generation,” he said. These factors led him to purchase shares at deeply distressed valuations, whilst it was long announced that reform was coming to the sector.

“The ongoing restructuring of the sector, all government controlled, resulted in concrete proposals to sell their coal assets to the government at reasonable to favourable prices, the proceeds of which will be leveraged with EU funds and wholly invested in renewable energy,” Zafari continued.

“This dual “ESG” and financial turnaround is radically altering the outlook of the stocks, partly as the coal segments were also poorly performing in financial terms, whilst their replacement with renewables not only provides a new growth angle to the sector but also removes substantial “barriers to investment” for institutional investors,” he said.

“Whilst many fundamental weaknesses remain, the above transformation is driving a material re-rating in the shares, as they transition from distressed-like levels to merely being perceived as inefficient, government-controlled shares – this could be several folds in its entirety,” Zafari added.

Greek banks – Alpha Bank (ALPHA GA) and Piraeus Bank (TPEIR GA)
“The Greek banking sector has [had] a chequered history since the global financial crisis, having effectively wiped out and/or diluted equity holders several times. However, the onset of a meaningfully positive yield curve in the eurozone has now radically improved their fundamentals – best seen by their proposed resumption of dividends and buybacks for the first time since 2007,” Zafari said.

“Crucially, we have an oligopolistic banking sector structure, dissipating the legacy of the 2015 imposition of capital controls and a country operating on a different political and economic cycle to the rest of the eurozone. This has resulted in very strong net interest margins, with rising returns on the banks’ loan books, despite minimal increase in the costs they must pay to attract deposits,” he continued. “Furthermore, the long crisis meant that Greek banks have only made loans to high quality borrowers in the past 10 years, so rising interest rates are unlikely to result in a material increase in loan loss provisions.” 

“This growth story is available at still discounted valuations, as the sector transitions back into the purview of mainstream investors. This comes after a long period in the cold, with Greece’s pending credit rating upgrade to investment grade later this year acting as a catalyst that will benefit the sector enormously,” he concluded.

Founded in Geneva, Quaero Capital is a specialist fund management group. It offers a range of investment strategies through its Luxembourg, Swiss and Irish regulated funds as well as private equity funds investing in European infrastructure and French real estate.