Introduction
A closer look at the MSCI Emerging Europe index reveals it comprises Russia, Poland, Turkey, Greece and Hungary. The FTSE Emerging Europe All Cap index has a broadly similar composition that includes the Czech Republic, Hungary, Poland, Russia and Turkey.
But emerging Europe indices have struggled over the past 12 months to September 25, as data from FE Analytics demonstrates. The FTSE Emerging Europe index posted a 21.2 per cent decline, while the Euromoney Emerging Europe index was down 20.6 per cent.
The Euromoney Emerging Europe ex Russia index fell 14.4 per cent over the same 12 months, underlining how Russia has been a drag on the region. The oil-exporting country has been affected badly by the sharp decline in the price of the commodity, while the ongoing crisis in Ukraine continues to create political instability in the region.
Certainly, political risks abound in many of the countries that constitute emerging Europe. Oleg Biryulyov and Sonal Tanna, who manage the JPM New Europe fund, point out developed and emerging market equities ended the first half of this year flat, “giving back their strong gains since March’s lows”.
The managers explain: “The reversal seems to have had its roots in emerging markets, with the retracement of China’s April surge and the Greek debt saga chipping away at investor optimism. Smaller markets have taken centre stage and pushed up volatility in the region.
“The surprise failure of Turkey’s ruling Justice and Development party to win a majority in June’s parliamentary elections resulted in a swift sell-off, but the market recovered gradually as investors became more comfortable with the idea of a coalition government and focused their attention on more urgent worries in Greece.”
There are also some opportunities in the bond markets in eastern Europe for those investors who want exposure to fixed income. Gam’s Enzo Puntillo, manager of the JB Emerging Markets Opportunities Bond fund, notes the outlook is positive in some markets.
But he warns that “areas to avoid include local currency bond markets in eastern Europe, particularly Poland. This market is among the most expensive in the emerging region, buoyed by the country’s strong economy and a sharp drop in rates in sympathy with the ECB’s monetary loosening policy.
“Hard currency bonds in the region – for example, in Hungary and Croatia – are more attractive. These offer much better value than their local currency peers.”
The emerging Europe story could be another way for UK investors to access both Europe and the emerging markets theme, but they should be wise to the political uncertainty that has dominated the region of late.
THE PICKS
Baring Eastern Europe
Manager Ghadir Abu Leil-Cooper runs this $867m (£572m) portfolio that offers exposure to Europe’s emerging markets. Her largest weighting is to Russia, which accounts for 51.8 per cent of the fund, with Turkey at 21.2 per cent and Poland making up 14.6 per cent. Russian-based companies Lukoil, Sberbank and Magnit PJSC fill the top three positions in a fairly concentrated portfolio of just 52 holdings. The fund has performed broadly in line with its benchmark, the MSCI Emerging Markets Europe 10/40 index, making a loss of 33.3 per cent over three years to September 25, while the index declined 33.1 per cent over the same period.
Pictet Eastern Europe
This fund, which has 67 holdings, is co-managed by Klaus Bockstaller and Hugo Bain. The duo are heavily exposed to Russia, which accounts for 57.4 per cent of the portfolio, while Turkey and Poland make up 16.4 per cent and 15.1 per cent, respectively. There are some familiar financials and oil and gas holdings in its top 10, such as Lukoil, Sberbank and Gazprom. These holdings partially explain why the fund has – like its peers – struggled of late, delivering a loss of 28.8 per cent over the past year.
EDITOR’S PICK
Jupiter New Europe
This fund is just ¤4m (£3m) in size, even though it launched in November 2007. It is managed by Colin Croft, who took over in January this year, although he had been co-managing the fund since the start of 2010. He adopts a bottom-up approach to stock selection, looking for company-specific factors to generate outperformance. Among Mr Croft’s top 10 holdings are Russia’s Gazprom and Komercni Banka in the Czech Republic. As with many funds offering exposure to emerging Europe, it has struggled to deliver returns, producing a 22.5 per cent loss in the past year to September 25, FE Analytics data shows.
