Does emerging Europe offer long-term prospects?

This article is part of
Guide to investing in emerging markets

Does emerging Europe offer long-term prospects?

Europe can be overlooked as part of the emerging markets asset class.

This could be a misunderstanding about what constitutes emerging Europe or a lack of knowledge about the potential investment prospects in these countries.

Some of the countries which might fall into emerging Europe include Hungary, Romania, Poland and of course, Russia.

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Investors are probably familiar with Russia as an emerging market, due to its inclusion in the BRICs grouping.

In the past, emerging Europe has fallen behind its emerging market peers, but Arrash Zafari a portfolio manager from Quaero Capital’s small and mid-cap investment team, believes this does not mean there are fewer opportunities for investors.

He explains: “The region stands out as having relatively immature capital markets, even compared to others within the EM universe. 

“However, having lagged many EM peers for several years, until recently, there is still an appealing opportunity in terms of relative valuation, with the caveat that investors should be selective and willing to do their homework.”

For this reason, he suggests emerging Europe is not well suited to passive or index-based investment strategies.

According to FE Analytics, in the past three years to 28 August 2017, the MSCI Emerging Markets Europe index is up 17.3 per cent, some way behind the MSCI Emerging Markets index, which gained 37.3 per cent over the period.

The MSCI AC Europe index was also up an impressive 35.6 per cent over three years.

But in the past 12 months to 28 August, FE Analytics reveals the MSCI Emerging Markets Europe index is ahead, up 28.4 per cent, compared to the MSCI Emerging Markets index gain of 25.7 per cent and the MSCI AC Europe index which climbed just 20.8 per cent.

Weighing up the potential

Jan Dehn, head of research at Ashmore Group, notes: “Growth is picking up strongly in several eastern European countries. The economic upswing in the EU ‎will support exports.”

But Mr Dehn believes the opportunities are greater in Latin America than in eastern Europe in general.

So does emerging Europe offer long-term investment prospects, for those investors prepared to ride out the ups and downs?

“Yes it does,” replies Mr Zafari, “especially for those investors who are truly long-term and also willing to look beyond the very largest and most liquid securities in the region. 

“Actually, many of the biggest companies are government controlled and thus often have conflicting interests to those of minority investors (e.g. political considerations, rather than purely value creation), inhibiting their ability to offer superior long-term prospects.”

What is there to like in emerging market Europe?

According to Sergey Dergachev, lead portfolio manager, emerging market debt at Union Investment there are many reasons to like the region.