Russia, Turkey and Poland offer structural growth opportunities in consumer-related sectors and infrastructure to investors, says Baring Asset Management (Barings).

There is currently a superior growth outlook for emerging Europe, says manager of Baring Emerging Europe plc and the Baring Russia Fund, Matthias Siller, in comparison to developed Europe, which is being driven by private consumption and investment. The sovereign debt situation in these regions is also far better than that in the Eurozone periphery.

“This year’s events have made bond markets differentiate risk far more efficiently than they have in the past,” Siller said. “Historically, the two sovereign bond markets most affected by risk aversion were Turkey and Russia. Nowadays we believe these two economies resemble a gold standard for sovereign bond portfolios. A combination of credible fiscal strategy, a sound banking system, ample liquidity and low levels of government debt have led to a situation where the Eurobonds of turkey and Russia yield far less than those of Greece or Portugal. The weakest sovereign debt fundamentals in emerging Europe can be found in Hungary but even there the situation more closely resembles Germany than Greece.”

Siller added that other elements of the region, such as strong, liquid banking systems and insurance companies, and a reliance on the local market for refinancing state debt. “Being able to raise financing domestically, instead of relying on nervous international capital markets, has proved to be a big advantage over the last few quarters.”

The key to Central Europe’s economic success over the last ten years is a competitive export model in close co-operation with multinational companies, Barings said. Free-floating local currencies, as in most countries of emerging Europe, can act as an automatic stabiliser in economic distress, by balancing the current account through depreciation. This is not, however, an option available for Eurozone members.

“A major plus as far as emerging European economies are concerned is that, in most cases, the banking sector will not have to shrink its balance sheets but is in a position to grow loan books from a base of high capitalisation ratios and ample liquidity. A functioning banking system will be crucial to make optimal use of EU development funds that will be disbursed to the regions for infrastructure projects over the next three years. These funds are directly paid out of the EU budget and – if successfully drawn by the private sector and co-financed by the local banking sector – will contribute between two per cent and four per cent of extra GDP growth per year.”

Siller concluded: “The credit multiplier and expanding loan books of emerging European countries will support economic growth, while stable sovereign balance sheets should keep the cost of credit in check. While sovereign bond markets have been swift to price in this outlook, emerging Europe’s equity markets still trade at a discount to both global emerging markets and developed European markets. We believe this presents long-term investors with an attractive opportunity.”

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