Emerging Europe poised to rebound

But many forget the large swathe of central and eastern European markets that are generally lumped in with emerging markets.

Russia is by far the largest of these, but the MSCI Emerging Markets Europe index actually covers six countries – Turkey, Poland, Hungary, the Czech Republic and, more recently, Greece, alongside Russia.

The key question of course is whether any of these markets offer any value, given the sell-off in emerging markets generally.

Manu Vandenbulck, portfolio manager at ING Investment Management, points out: “The region is quite attractive today from a dividend-yield perspective. The yield in the region is roughly 4 per cent, which is the most attractive we’ve seen for five years. It is very well covered by earnings so it means dividends are sustainable in the region. They could grow to double digits this year as European economies recover.”

But these emerging markets have underperformed with the MSCI EM Europe index recording a loss of 14.78 per cent for the 12 months to February 12 2014 compared with a loss of 12.84 per cent from the MSCI Emerging Markets index and a positive 12.53 per cent from the MSCI Europe index.

Dr Ghadir Abu Leil-Cooper, head of the EMEA and global frontier markets equity team at Barings Asset Management, notes that issues such as US tapering of quantitative easing and a slowdown in China could affect countries in different ways depending on their current account surplus or deficit and their exposure to either western or emerging markets.

She adds: “Emerging Europe has underperformed global emerging markets (GEMs) and developed Europe for a while now. That reflects the tapering and China not being as strong a driver as before, so there has been a lot of adjustments in valuations in those markets. If you look at Turkey, that is looking like it is on multi-year lows in terms of valuations. Meanwhile if you look in terms of dividend yield, you’ll find these countries give you a higher dividend yield than GEMs or Europe.”

Peter Fitzgerald, head of multi-assets at Aviva Investors, adds that rather than looking at emerging market equities as a homogenous unit, the team look at different regions.

“Within all our portfolios last year we had - and continue to have - an underweight to emerging markets, but within that we have had an overweight to emerging Europe. This has really been driven solely by valuations; emerging Europe has lots of difficulties, but valuations are cheap.”

Unsurprisingly, Russia dominates the index, accounting for approximately 58.74 per cent of the MSCI EM Europe index, but this could be why investors are looking to the region.

Julian Mayo, co-chief investment officer at Charlemagne Capital, says: “The Russian economy has been structurally a relatively slow growing economy and the authorities recognise the economy needs to be made more competitive. So there are some reforms going ahead, such as trying to make Moscow more of a financial sector, encouraging higher dividends and making it easier to trade Russian shares.”

Turkey, meanwhile, appears to be the black sheep of the region, with Mr Vandenbulck noting it is one of the countries they avoid. “We’ve clearly seen some weakness there but we feel valuation support is not yet good enough to find a margin of safety,” he says. “Turkey still faces huge inflation and monetary tools are limited, so we avoid Turkey for the time being.”

Dr Abu Leil-Cooper notes that there are clear negatives regarding Turkey, such as a large current account deficit, expectations of higher inflation, a depreciating currency and a likely slowing of consumer demand following the recent interest rate hike.

Mr Mayo adds that overall the region is benefiting from the recovery in western European economies. “You’ve had an unusually harsh export environment for those countries in the past year or so, and the fall in currencies - particularly the Turkish lira - is part of the process by which these economies become more competitive again. So exports are a tailwind now rather than the headwind they have been,” he says.

Dr Abu Leil-Cooper concludes: “Emerging markets have sold off a lot and on top of that emerging Europe is trading at a discount to GEMs, so any recovery, any change in investment appetite will cause those markets to recover.”

Nyree Stewart is features editor at Investment Adviser