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Erdinç Benli, Swiss & Global AM

Eastern European markets offer high growth rates and attractive entry opportunities


The slump in Russian and Turkish equity markets has come to an end, says Erdinç Benli (pictured), Head of Emerging Markets Equities at Swiss & Global AM…

The RTS and ISE 100 equity indices have risen by more than 25 per cent since March, while the MSCI World Index rose just six per cent over the same period. The markets have stabilised as a result of the initial de-escalation of the Ukraine crisis and the Turkish communal elections. The political situation in Eastern Europe is improving and there are further opportunities in Russia and Turkey beyond the initial recovery.

At a price-earnings ratio (P/E ratio) of five and a price-to-book ratio (P/B ratio) of 0.7, Russia is significantly  undervalued and has rarely been as cheap over the last 15 years. However, contrary to the past, Russian businesses are now paying good dividends of around five per cent on average, with some paying as much as 10 per cent. There is also further potential to increase these dividends as some pay-out rates are still very low. Many investors are sceptical about the Russian market because, in addition to an uncertain political situation, it has a weak GDP. However, because of high export figures the majority of Russian companies do not rely on domestic consumption. Some domestic sectors, such as Russian retail, are also seeing strong growth opportunities.

Despite a flagging Turkish lira, the Turkish equity market has improved. The rally in Turkey is driven by considerable improvement in consumer sentiment following the communal elections. In addition, the Turkish Central Bank triggered falling capital costs, particularly for banks, with an unexpected cut in the key interest rate. The loosening of European monetary policy is also having a positive effect on the Turkish market and the Turkish lira has stabilised. In the medium term, infrastructure projects in the pipeline, such as the new Istanbul airport and the third Bosphorus bridge, will boost economic growth.

Other Eastern European emerging markets, such as Romania, also present attractive opportunities for investors. Many investors underestimate the potential of the Eastern European market, with an increasing number gravitating towards other regions such as Asia and Latin America. Europe's emerging markets are considerably cheaper; the discount compared to other emerging markets is as much as 50 per cent. Political uncertainty in countries like Russia and Turkey has concerned a number of investors, resulting in equities priced significantly below value.      

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