* Utilities benefiting from regulatory reforms
* Reduced exposure to Poland ahead of IPO stream
By Claire Milhench
LONDON, April 6 (Reuters) - BlackRock <BLK.N> is betting on
Russian utilities in its Eastern European Trust <EST.L> on the
back of aggressive restructuring, whilst the market itself is
trading at half the multiples of Brazil and China.
"This is a country that people love to hate," said Sam
Vecht, who has managed the trust since May 1, 2009, when
BlackRock took over the mandate from Pictet.
The market is trading at only 7x-8x earnings, but
historically Russia has generated roughly the same return on
equity as Brazil and China, he said.
Some investors argue that Russia should trade at a discount
because of its corporate governance issues but Vecht said it
could go up another 50 percent and still trade at a 25 percent
discount to Brazil and China.
Among his biggest holdings are Russian utilities such as
Novatek <NOTK.MM>, an emerging gas major, and RusHydro
<HYDR.MM>, a hydroelectric power company.
"Utilities have been the best performing stocks in Eastern
Europe this year -- it's a story of restructuring and
transformation," he said.
Novatek has new production that it can bring on-stream
relatively cheaply, whilst its management team is highly thought
of and has met its targets for a number of years, he said.
RusHydro has been a beneficiary of electricity industry
reform but trades at a fraction of other hydro operators.
Other big holdings include Gazprom <GAZP.MM>, Surgutneftegaz
<SNGS.MM> and Czech energy company CEZ <>.
PERVASIVE SCEPTICISM
Eastern Europe is the most unpopular region amongst global
emerging market managers but Vecht believes the pervasive
scepticism is unfounded.
"We are seeing real changes that have escaped people's
attention -- perception is very much at variance with reality."
He argued that Hungary, which has cut government spending to
tackle its fiscal deficit, was now a fiscal leader in the OECD.
A key holding is Hungarian retail bank OTP <OTPB.BU>, which
trades at 1.2x book value, but returned 16 percent on equity in
2009. "The stock has done well since it troughed last year but
it is still very cheap on a global basis," he said.
Vecht has recently reduced his exposure to Poland due to a
stream of upcoming IPOs such as insurer PZU [], which will
be good for the market but could lead to "some indigestion".
His bearish view on Turkey reflects his concerns about
inflation, but this hasn't yet impacted the market.
He participated in the recent IPO of Turkish gold miner Koza
Altin <KOZAL.IS>, one of the cheapest gold miners globally,
trading at 7-8x earnings. It plans to increase production with
three new mines, and will benefit from the fact that Turkish
gold lies near to the surface, reducing excavation costs.
According to Lipper data, the trust is up 136.55 percent in
the 12 months to end-March and has beat its peers in the AIC
Investment Trust European Emerging Markets sector by 8.05
percent. It has some 147 million pounds ($222.9 million) in
assets.
($1=.6595 Pound)
(Editing by Jon Loades-Carter)
