A new dawn for emerging Europe?

Diego Higuera, investment research analyst at OBSR, picks his top emerging Europe funds.

Investing in emerging Europe is attractive for a number of reasons. The region, particularly Russia, has vast natural resources, while industries such as consumer finance, telecommunications, healthcare and retail still have – relative to developed markets – low levels of market penetration. Governments in the region are also pursuing more credible economic policies which can make them more attractive to investors over the longer term.

However, there are some risks which investors should be aware of. Political instability, poor corporate governance, currency instability, corruption and opaque taxation policies are among the major challenges in the region.

Indeed, shareholder value has been destroyed by governments in the past and the Russian government’s actions towards Mechel in 2008 and Yukos in 2004 is a reminder of its willingness to repatriate former state-controlled assets. Such major setbacks can have a significant effect on the region’s performance given that Russia is a large constituent of the index.

Russia leads the way

That said, Russia has been the strongest emerging European market and has significantly outperformed both the MSCI Emerging Europe index and broader emerging markets during the past decade.

Since the global economic recovery began in 2009, Russian equities have been driven by the global demand for commodities as energy and natural resources dominate the country’s stock market. More recently, a sharp rise in oil prices – caused by disruption to global supplies following the escalation of tensions in the Middle East and Libya – has given Russian stocks a further lift.

Although Russia’s influence on the index is notable, Turkey and Poland have also been among the top performing markets recently. The former has, in part, been boosted by a growing financial services sector, mainly in consumer finance, which has been supporting demand for consumer goods.

Elsewhere, central European countries such as the Czech Republic and Slovakia have benefited from the global recovery in autos as they are key manufacturing hubs for the industry.

Recommended funds

Should investors wish to access emerging European markets, there are several funds OBSR would suggest they consider.

For all-cap exposure, East Capital Eastern European is managed by a team of experienced fund managers based in different locations throughout Eastern Europe. The team has extensive knowledge of the local markets and a broad network of local contacts, which we feel is one of its key strengths. The fund offers investors a well-diversified portfolio of Eastern European equities across a number of countries, sectors and companies with different growth drivers.