Investment briefing: Emerging European markets

31 August 2016

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.


Oleg Biryulyov, manager of the JPMorgan Russian Securities investment trust, is optimistic about the future, even though he doesn’t expect EU sanctions on Russia to be lifted this year.

“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:

Jupiter Emerging European Opportunities fund

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.