The eurozone is in deflation. The euro itself has weakened drastically over the past few years and it shows no sign of a recovery any time in the near future. With elections looming in Germany, Spain and the Netherlands, there may even be some political uncertainty over the next 12 months. So which areas can investors expand into outside the eurozone?
Outside of the monetary union of 19 states, Europe can easily be divided into two major economic areas excluding the UK and Switzerland –which recently saw its currency soar by 30 per cent after it removed its cap on the franc’s value against the euro. The Nordic countries – covering Norway, Sweden, Denmark and Iceland – and emerging European countries – which covers a vast area from the Czech Republic, Russia and Poland.
Chart 1 and Chart 2 look at the Organisation for Economic Co-operation and Development’s (OECD’s) projections for GDP growth and unemployment respectively, comparing the eurozone with Norway, Sweden, Turkey and Russia. While the eurozone has seen some of the lowest growth rates, unemployment rates have not been much better, currently standing at more than 11 per cent.
David Reid, co-manager of the BlackRock Emerging Europe investment trust, says emerging Europe is an area that offers something different to mainstream Europe. “One thing that is very clear is value. If you take the MSCI index as a basis, emerging Europe trades at less than 6x p/e, while Europe trades at 12.5x. So for every pound you invest in emerging Europe, you are getting twice as much earnings for your money than you do in developed markets.”
He says it is not just about earnings, but dividends are also important to consider. “The dividend yield in emerging Europe is now 4.7 per cent, which is really quite appreciable and nice to have.”
Let it grow
Another area to consider is growth. Mr Reid says, “We are in a situation now where you look at the European Union countries and they are growing by less than 1 per cent in real terms, but compare that with somewhere like Hungary – which last year grew the fastest it has done since 2006 – at 2.2 per cent, and Romania which is growing around 3.5 per cent.”
“What is important looking at equities is the potential growth. These are long-term investments and most of the countries have a long way to go until they converge with Europe so you can expect them to be growing more quickly as a result of all the competitive advantages they have,” he adds.
Opportunities in Turkey
Looking back at January 2014, Mr Reid says he bought heavily into Turkey, while it was still an unfavourable market. “People were very much worrying about the ‘fragile five’ [Brazil, South Africa, Indonesia, India and Turkey] and rising interest rates globally. Now it has gone in the other direction over the course of 2014, but there was a lot of panic at that time. It was somewhere quite interesting because typically, when other people are panicking, there’s an opportunity for investors who know these markets. So we invested quite heavily there and that worked very well for us.”