Wealth Management and the return of Eastern Europe
by Heat Recruitment
By Joe Cowell
The economies of Eastern Europe’s largest countries are taking a turn. Romania, Poland, Hungary and the Czech Republic, whilst once impacted by a crisis and their own ‘lost decade’ of economic performance, are now once again on the rise.
Currently, the region is noting economic growth far above the EU average of 2.4%. Romania, the Czech Republic and Poland respectively noted year on year growth of 5.7% 4.7% and 4.4%, according to data from the International Monetary Fund (IMF).
In 1989, Romania saw protests and riots in their revolution, mirrored by events in Poland, Hungary, Eastern Germany and the then Czechoslovakia, among others, culminating in the symbolic fall of the Berlin Wall, and the lessening of Soviet influence in Eastern Europe. In 1991, we saw the rise of the Commonwealth of Independent States – also known as the Russian Commonwealth.
Today, with Romania ranked as the fastest growing economy in the EU for 2017 according to the World Bank Group, the former Soviet Blocs are now experiencing unemployment levels so low that it’s “a problem”.
For the wealth and asset management industry, however, this ‘problem’ has the opposite effect. With over-performing economies, strong infrastructure investment and a particularly bright future with greater say in EU policy, Eastern European equities have continued to deliver strong returns. Now that the CEE (Central and Eastern Europe) markets are emerging from a range of quantitative easing policies off the back of the last financial crisis, investment in these respective countries is looking more lucrative.
According to the iShares MSCI Eastern Europe Capped UCITS ETF, whilst in 2014 the total return on investment sat at -35.83%, rising to -5.17 in 2015, these figures have now stabilised. In 2016, shares provided a 34.81% total return, with a 16.96% return demonstrated in 2017.
Chris Colunga, the co-manager of the BlackRock Emerging Europe fund, confirmed that “Emerging Europe is just beginning to leave behind a lost decade of performance. The strong gains of 2016 and the first six months of 2017 still leave the index more than 40% below its pre-crisis peak.”
He continued, stating that equities in Eastern Europe are “trading on less than half the multiple of their developed peers, despite having higher dividends, growing earnings and strong free cash flows.”
Confirming these figures, Deloitte released its Central Europe Private Equity Confidence Survey in May of 2017, highlighting a confidence increase of 30 points in spring of 2017 – up from 71 points in October 2016. According to Deloitte, the rise was attributed to a “drop in respondents predicting further decline in the economic outlook, more optimism about the efficiency of financial investments and growth in the number of investors intending to buy more than they sell over the subsequent six months.”
Whilst, naturally, investments in emerging markets are more volatile than those in more established economies, the potential gains are undoubtedly more lucrative. With year on year growth, it’s clear why wealth and asset managers are beginning to return to Eastern Europe.
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