Investment briefing: Emerging European markets
But what about emerging Europe? At a time when the focus is on how Brexit may impact the UK’s trading relations with the likes of Germany, what are the prospects of making money from Eastern European countries?
These nations, including Russia and Romania, are less researched than developed European countries despite the fact they have delivered some attractive returns to investors who have been willing to embrace a degree of risk.
Darius McDermott, managing director of Chelsea Financial Services, believes they are overlooked because their stock markets are small, risky and have been out of favour due to the strong US dollar.
“Some were fashionable in the run-up to joining the European Union and enjoyed good periods, but are still high risk,” he says. “Russia has also had periods of being a very strong performer, although usually when the oil price is strong.”
Jim Harrison, director of London-based independent financial advisory firm Master Adviser, is also cautious. “It can be very exciting, but it’s an emerging market and what people forget about them is you have long periods where they underperform,” he says.
A look at the returns generated by funds specialising in this area suggests investors are wise to think carefully before committing their money to this area – with the old saying: “Don’t invest what you can’t afford to lose” being particularly apt.
There are around 50 funds focusing on emerging European equities and the performances they’ve achieved over the past decade have varied enormously, according to data compiled by investment research firm Morningstar to 10 August 2016.
At one end of the scale, there are funds enjoying a positive return of 47%, while at the other portfolios are down 39%. Of the 33 funds with 10-year track records, 12 have lost money over this period.
However, Colin Croft, manager of the Jupiter Emerging European Opportunities fund, insists there is money to be made from these areas and cites countries such as Georgia, Greece and Romania as being three prime examples.
“These are the kinds of market where stock-pickers willing to do the research have a good chance of finding opportunities to profit from situations where positive change has yet to be reflected in share prices,” he says.
One particularly strong performer for the fund has been Bank of Georgia, which Mr Croft added to the portfolio at the end of January 2016, and which subsequently returned around 47%.
“These ideas have room to run further as valuations are still reasonable,” he says. “I see more scope to add more positions in these undervalued markets, which are under-represented in stock market benchmarks.”
Elsewhere, the Schroder ISF Emerging Europe fund is overweight in Hungary, where it sees a supportive macro backdrop, reasonable valuations and strong bottom-up opportunities. It also has a slight overweight in the Czech Republic where valuations are also seen as OK.
There is a neutral position, meanwhile, in Russia. Although it has cheap valuations and stable inflation, the geopolitical concerns are seen as a potential headache and earnings risk.
“We believe that the long-term fundamental case for the Russian equity market remains intact and it continues to provide ample opportunity for active fund managers to add value,” he says.
However, many of the economies in the region have suffered more than developed Europe following the financial crisis and are likely to remain volatile, according to Adrian Lowcock, head of investing at AXA Wealth.
“Political risk remains high as changes in governments can swiftly bring changes in the outlook for the domestic economy and the opportunities for businesses, as well as the rights of investors,” he says.
Gavin Haynes, managing director of Whitechurch Securities, insists Eastern Europe is a niche that is only suitable for the more adventurous investor – and even then it should only account for up to 5% of their overall portfolio.
“Russia is the dominant market in the region (69% of the MSCI Eastern Europe Index), so to invest in the region you need to have a high level of conviction over the prospects for this market,” he says.
With the Russian economy very reliant on energy, he believes the recent recovery in the oil price could provide opportunities, although the geopolitical uncertainty across Europe could weigh on some of the Central European economies.
“For most investors they are likely to gain exposure to through a broad emerging markets fund rather than allocating to the region specifically,’ he adds.
Fund to watch:
The aim of this fund, which has been managed since the beginning of last year by Colin Croft, is to obtain long-term capital growth by investing primarily in Central and Eastern Europe.
The portfolio sits in the IA Specialist sector, and currently has just over 40 holdings. It is well diversified by both sector and geographical allocation, according to the most recent fund fact sheet.
In common with many funds that focus on these areas of the world, its largest country weighting (52%) is in Russia. Turkey is next with 20.3%, followed by 9% in Poland.
Other countries, each of which account for less than 10% of the fund, include Romania,
Greece, Hungary, Georgia and the Czech Republic. A relatively modest 2.1%, meanwhile, is being held in cash.
Financials is the most prominent sector with a 45.3% share, followed by 29.6% in oil and gas, and 9.1% in consumer services. Other areas include basic materials, consumer goods, industrials, telecommunications and utilities.
The top 10 holdings are worth 47% of assets under management and include chemicals firms, banks, oil companies and retailers. At present, the largest position is almost 10% in oil company Lukoil, followed closely by Russian bank Sberbank.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).