The scale of the emerging Europe region’s problems during the recent economic crisis should not be downplayed, but investors who held their nerve were greatly rewarded.
As the financial crisis swept through markets, emerging Europe became seen as a vulnerability to already battered European balance sheets. In the event, however, investors in the region who capitulated have found themselves missing out on a rally that would make most of western Europe jealous.
The scale of the region’s problems during the crisis should not be underestimated. Between May and October 2008 the Investment Trust Emerging Europe sector dropped almost 70% in sterling terms. Such a stark fall would have been enough to scare many away from what has historically been considered a high-risk arena.
Matthias Siller, who took over management of the Baring Emerging Europe investment trust in December 2008, says that despite the volatility he is keeping the risk profile of the trust steady.
”The stronger economies enjoyed a relatively calm ride through the crisis. Poland saw its GDP grow 4.8% year-on-year in 2008 and posted 1.7% growth in 2009”
“There are two reasons why we are staying at our normal risk profile, with a beta of around one,” Siller says. “There’s a clear mandate from our shareholders to go for the opportunities that emerging Europe offers and we feel the real risk is under-representing the region in a portfolio as that is where growth is coming from.”
Certainly the recent performance of the trust has been impressive. From the start of 2009 the trust has rallied 110.26% as the region bounced back strongly and fears of a collapse proved unfounded.
That is not to say that the region did not have its share of serious difficulties. During the crisis the International Monetary Fund was called in to provide loans to Hungary, Latvia, Ukraine, Romania and Serbia as they faced defaults and struggled to refinance debt. These were far from petty problems, and in fact went some way to reveal a modern myth of emerging market investment. (article continues below)
“The global financial crisis undoubtedly left its mark,” says Siller. “The typical emerging market country is not like China and relies on outside funding. As the crisis hit and foreign creditors started to refuse to roll-over debts, countries such as Hungary were caught out.”
The incidents garnered a lot of publicity, and no doubt helped increase the tide of money that was flowing out of the region. Russia was forced to suspend trading repeatedly in its domestic equity markets and to inject a significant proportion of its currency reserves to prop up the rouble.
Given the divergence in economic and market performance, having an ability to identify clearly where the drivers of growth are coming from is crucial. Siller points to Eurocash, a Poland-based company that deals in the distribution of fast-moving consumer goods, as an example of a company with excellent prospects.
“We invested in Eurocash, the largest cash-and-carry chain in Poland, as there was a solid basis for growth and a clear strategy coming from the management,” he says. “They are extremely cost-focused and share proceeds with their clients. They’re growing their market share.”
Another example he gives is Halk Bankasi in Turkey. The bank is majority state-owned with 25% floated on the stock exchange, but importantly it has a good track record of making market-based decisions. The com-pany has increased its profitability by 25% year-on-year since 2007.
Taken as a whole, the region undeniably presents a challenge for investors. While many look at Asia as the emerging market growth story, however, there is growing evidence that they may be missing something good closer to home.