The Central Europe

Central Europe Russia and Turkey Fund Inc (NYSE:CEE)

Deutsche Asset & Wealth Management                       

Annual Fund Overview:
As of October 2016

For the fiscal year ended October 31, 2016, the Central Europe, Russia and Turkey Fund, Inc. delivered a total return in U.S. dollar terms (USD) of 6.47% based on net asset value (NAV) and 3.15% based on market price. During the same period, the total return in USD of the Fund’s benchmark, the MSCI Emerging Markets Europe ex Greece Index, was 7.37%.1 The Fund’s benchmark was changed on March 1, 2016 from the MSCI Emerging Markets Europe Index to the MSCI Emerging Markets Europe ex Greece Index.2 The MSCI Emerging Markets Europe Index returned 4.33% over the reporting period. The Fund’s discount to NAV averaged 12.54% for the period in review, compared with 10.45% for the same period a year earlier.

The markets were again volatile during the course of the reporting period. After a very weak performance until mid‐January 2016 — driven mainly by further Brent oil price declines and persistently weak economic data in China — markets, with the exception of Turkey, recovered strongly in the following months. The key reasons that supported the markets were the expansionary monetary policies of the European Central Bank and the recovery of oil prices, thanks to OPEC’s planned cut of oil output.

Emerging European equity markets showed a mixed performance during the reporting period. The top performers were Hungary and Russia, with gains of 37.6% (BUX in USD terms) and 22.5% (RTS in USD terms), respectively.3,4 On the opposite side, Turkey lost 4.4% (XU100 in USD terms) and Poland decreased by 10.5% (WIG20 in USD terms).5,6 RUB (Russian ruble) and CE3 (Czech Republic, Poland and Hungary) currencies performed very stably against USD. However, TRY (Turkish lira) declined almost 6% amid domestic politics and external factors.

Sectorwise across all our regions, the best performers in the reporting period were energy, materials, consumer discretionary and health care (which however includes only Richter Gedeon) stocks. Industrials, utilities and consumer staples were the worst performers. In the reporting period we increased our positioning in energy due to a strong recovery in the oil price and decreased our weightings in financials, mainly in Poland and Turkey. We reduced our positions in consumer staples, namely in Magnit and Dixy Group* due to sales figures persistently below expectations. We also reduced our position in X5 Retail Group. These transactions mainly reduced our country allocation in Russia. In Poland we sold our position in footwear company CCC and replaced it with one in Eurocash, a wholesaler of consumer goods. Given the particular uncertainties in individual countries such as Turkey, we kept a relatively high cash position during the reporting period.

Russian equities recovered strongly from their December lows, mainly due to an increase in oil prices and stabilization in the domestic economy. Inflation has fallen faster than expected and the Central Bank of Russia has maintained its hawkish view while cutting interest rates several times in 2016. However, further rate cuts are highly unlikely to happen before the end of the year. The increase of the dividend payout for state‐owned enterprises proposed by the Finance Ministry by early 2016 was welcomed by investors. The dividend yields of the Russian equity market are already among the highest in the emerging‐markets universe. The biggest outperformer in the financial sector was Sberbank of Russia PJSC, benefiting from its dominance in the domestic market and a significant improvement in net interest margin, which brought return on equity above 20% in the first 10 months of 2016. In the oil segment Lukoil PJSC and Rosneft PJSC were the leaders due to operational improvements.

The year 2016 was a very turbulent one for Turkey, and investors have experienced a veritable rollercoaster ride. Until the end of April 2016, the equity market was performing very well due to the sound macroeconomic environment and a declining current account deficit. Furthermore, in March 2016, Turkey reached a refugee deal with the European Union (EU). In May, there was an equity sell‐off in response to the resignation of the Turkish prime minister. Following the sell‐off through the middle of July the market improved, mainly due to improved relations with Russia.

However, the relief rally ended abruptly when a failed military coup happened. As the result of domestic events and a strong USD, TRY is currently trading at all‐time lows, which led the Central Bank of the Republic of Turkey to stop cutting rates. Gross domestic product (GDP) growth seems to be losing momentum.7 On the political front, the risk of a referendum on a new constitution based on the executive presidency has further increased. The worst performers by far were stocks related to the tourism sector, as the country was hit by several terrorist attacks and remains in the middle of geopolitical tensions.

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Central Europe Russia and Turkey Fund Inc (NYSE:CEE)