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Emerging Europe offers gold standard to investors, says Barings


Matthias Siller, manager of Baring Emerging Europe and the Baring Russia Fund, believes there is currently a superior growth outlook for emerging Europe, including Russia, being driven by private consumption and investment.

Furthermore, Barings believes that as a general rule, the sovereign debt situation in emerging Europe is far better than in the Eurozone periphery.

Siller says: "This year’s events have made bond markets differentiate risk far more efficiently than they have in the past. 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."

According to Siller, not only is the state of sovereign financing far more sustainable in emerging Europe, but there are also some little known additional features that add to the attractiveness of the region.

For example, in many cases, emerging European countries boast strong, liquid banking systems and insurance companies and rely 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.

Barings believes that Central Europe’s economic success over the last decade has been founded on establishing a competitive export model in close co-operation with multinational companies. Superior economic growth came on the back of a lean economy and flexible labour market and led to export to GDP ratios of over 60 per cent.

The fund manager notes that 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 option is not available for Eurozone members. At the same time, Barings believes that countries with a relatively large domestic share of the economy, such as Turkey and Poland, offer structural growth opportunities in consumer-related sectors and infrastructure. It was exactly this potential that made Poland the only European economy that did not shrink in 2009.

Siller says: "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.

"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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