Ask The Experts: Eastern Europe, Not Just A Commodity Story
Stefan Herz, Portfolio Advisor, Charlemagne Capital (UK) Limited, an advisory of Manulife Eastern Europe group of funds shares with us the investment outlook in emerging Eastern Europe.
1) What is your investment outlook for Eastern Europe in general in the second half of this year? Although the Greek election has provided some relief for investors, the European problems remain intense. How will the Eurozone crisis weigh on Eastern European equities?
- Positive on Eastern European economies: very little government and private debt, solid banking system, strong consumer confidence and continuing consumer demand
- No significant contagious effect on Eastern Europe; valuations compelling, for example, Russia is trading at a 50% discount as compared to global emerging markets (which is near the level last seen in 2008)
2) What are the main drivers for Eastern European equities?
- Turkey: young population and growing middle class drive household formation, demand for consumer products and financial services over the next few years
- Russia: resources continue to be the main driver, and there will be more reform (government attacking corruption, increasing capital market reform and liquidity into financial markets) going forward, Russia will also benefit from the increasing trade flows between emerging markets
3) Within the region, which countries are likely to do better than others?
- Most excited about Russia and Turkey
- The structural changes highlighted will take place over the long term, investors shall have an investment horizon longer than 6 months
4) What are the implications for Russian economic development of Putin victory in the election?
- In Russia, things happen very slowly so any kind of reform will take place for a few years, but the government major focus is to deal with corruption and to strengthen the capital markets, making funds easier to invest directly in the Russian market
- Another development is entering the WTO earlier this year, and this will force Russian companies to be more efficient when facing competition from imports
5) Which sectors do you see the most growth potential? What is your outlook for oil in the next 6-12 months?
- Overweight consumers and underweight basic materials, in line with the long-term investment theory that Eastern Europe is not just a commodity story, but a case of growing middle class, rising income and increasing demand for consumer goods
- In terms of oil price, agree with market consensus that oil will finish the year at around 90-95 dollar level
6) Given the lingering gloom in the Eurozone, what risk factors should Eastern European investors be aware of?
- Turkey: economy slowing down to deal with current account deficit
- Russia: further pressure on oil prices
- Economic risks can be reduced through sensible policy reforms and a commitment to keep inflation low
||: Ask The Experts: Eastern Europe, Not Just A Commodity Story