Emerging Europe Outlook Continues to Improve
At a time when global growth forecasts are being downgraded, IMF's projections for Emerging Europe are up by 0.6% and 0.2% for 2019 and 2020, respectively.
Last week the IMF published its World Economic Outlook with updated growth projections, as well as detailed analysis of the regional economic trends across the globe. It did not paint a rosy picture overall, as global growth was forecast at 3.0% for 2019, its lowest level since Sep 2008 and a 0.3 percentage point downgrade from the April 2019 World Economic Outlook. There was, however, a silver lining. Namely, that growth is projected to pick up to 3.4% in 2020 (a 0.2% downward revision compared with April), reflecting a projected improvement in economic performance in a number of emerging markets in Latin America, the Middle East, and emerging and developing Europe.
What, in our view, is quite exceptional is the fact that despite a consecutive downward revision in global growth, projections for Emerging Europe are being raised by 0.6% and 0.2% to 1.8% and 2.5% for 2019 and 2020, respectively. This is yet another testament to the resilience displayed by Emerging Europe and the gradual decoupling of the region’s economies from developed Europe. While the region is still vulnerable to external challenges, in recent years the softer external sector has been compensated by robust domestic demand, as well as its labor cost and tax advantages. The recent softening of inflation gives local central banks the option of becoming accommodative, while relatively low levels of public debt leave room for fiscal initiatives at a time when calls for that are becoming more and more vocal. Thus, the case for investing in Emerging Europe remains compelling.
Yet, perhaps paradoxically, despite the underlying economic strength and solid earnings momentum for most companies, regional equity markets continue to lag developed peers, plagued by global risk aversion and lower liquidity. Valuations have become even more attractive with 6.7x P/E F2019 vs 12.9x for global emerging markets and 14.2x for developed Europe, for instance. Emerging Europe also remains the only major region trading at sub 1x P/B. Dividend yields, on the other hand, are the highest at 6.3%, which combined with subsiding inflation expectations and easy global monetary policy has the potential to attract significant flows once global recession fears dissipate and some calm returns on the trade dispute front, given how underweight the region is in global investment portfolios.
In our view, Poland, Hungary and the Czech Republic offer significant value with a relatively high margin of safety. We also like the valuations and attractive dividends in Russia, especially the oil and gas sector. To put things in perspective, compared to the pending IPO of Saudi Aramco, valued at $1.5-2 trn, the Russian O&G has a combined market cap of $367bn, but produces a similar amount of crude oil and also almost the same quantity of gas. In other words, it produces twice as much hydrocarbons as Saudi Arabia, but can be purchased for about one-quarter of the supposed price of Saudi Aramco!
Turkey also provides good prospects in the medium term as inflation and geopolitical risks subside, provided investors can stomach the volatility.
Karoll Capital offers investment solutions in the Emerging Europe region through a range of mutual funds: Advance Emerging Europe Opportunities UCITS (focused on Central Europe), Advance Eastern Europe UCITS (primarily focused on Russia and Turkey) and Advance Invest UCITS (focused on Bulgaria and Romania), as well as via separately managed accounts and investment advisory services.
Finally, Advance Eastern Europe UCITS was the best performing mutual fund in Bulgaria as of Q3 2019-end, with a +22.5% net return.
You can find the full report on the IMF official website.