One thing you can say for sure about Eastern European markets is they are extremely volatile. Russia either ends up being the bestperforming market in the world or the worst.
For instance, in 2008, it fell by around 80 per cent but in 2009 it went up by over 100 per cent. Generally speaking though, the region has been unloved for at least the last four years and has seen net outflows of investor money.
Over that time, sectors such as Latin America have doubled in price whereas the Russian market has made comparatively little progress. Yet from a company earnings’ point of view, the region sits somewhere between Asia and Latin America, so the lack of attention may be unjustified.
There is a perception, of course, that there is widespread corruption in Russia and it is merely a leveraged play on the price of oil. There are also fears over the finances of some of the smaller Eastern European nations. There is some truth in all these factors, so when investing in the region you need to know who you can trust. An experienced fund manager, such as Elena Shaftan who manages the Jupiter fund, is absolutely invaluable.
According to her, the influence of the oil price on the market has diminished. When the price fell precipitously in 2008, Russia’s financial system and currency was hit hard and it contributed to the afore-mentioned slide in the market. However, oil is now priced at around $80 a barrel, to her, a far more sustainable level than the $140 a barrel seen briefly in 2008. She believes that, within the range of $60 to $80, the Russian economy will continue to grow at a reasonable pace.
Furthermore, national finances are in better shape than previously anticipated. The budget deficit is only 5.9 per cent of GDP whereas the consensus a year ago was that it would be at least 8 per cent.
Another positive to draw comes from disposable income. In contrast to the UK, it is growing strongly, even among the elderly, as the government have provided generous increases to pensions. Consequently, retail sales have been robust, though they have fallen back a little as savings have increased instead. In fact, in the very short term she is a worried about consumption as this may cause some disappointing earnings’ numbers in the first quarter of this year.
Nevertheless, she has already played the retail sector through companies such as Wimm-Bill-Dann Foods, one of the leading companies in dairy products. The firm also produces fruit juices, which saw an 100 per cent increase in sales over the last year.
Elsewhere in Eastern Europe, there is much to be positive about. Many nations are benefiting from the trend of outsourcing by Western European firms taking advantage of a good standard of education and fast delivery times.
Shaftan points out that much of Eastern Europe is in considerably better shape than Greece and there are some good growth prospects for some countries.
For instance, she holds Turkish stocks, particularly banks, which have been among the most profitable in the world, having benefited from low interest rates and increased lending activity.
Poland avoided recession altogether thanks to the injection of EU funds and an easing of the unemployment problems. Even Hungary, which has been through a much tougher time, has significantly reduced its budget deficit and the economy should start growing again this year.
It is Russian holdings that dominate the portfolio though and it is not surprising to see energy giants such as Gazprom and Lukoil feature heavily, although Shaftan is underweight in energy generally.
Russia remains extremely cheap by emerging market standards but the discount is partly down to the West’s long standing suspicions.
However, if the price of oil remains around the $70-80 mark, I would expect this fund to do well over the course of this year. Speculative, yes, but if you have the nerve, an exposure of around 5 per cent to Eastern Europe seems quite reasonable to me.
Mark Dampier is head of research at Hargreaves Lansdown