Is Eastern Europe really uninvestable?
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As the ongoing war between Ukraine and Russia and the power crunch in Europe exacerbate the impact of declining liquidity globally, investment opportunities on the continent seem few and far between - especially when it comes to Eastern Europe.
However, NS Partners, Sub-Investment Managers of the Nedgroup Investments Global Emerging Markets Equity Fund are looking to the areas in Eastern Europe currently being neglected by the markets and see some potential opportunities on the horizon.
“Based on our liquidity analysis, we are quite bearish on Eastern Europe. Our view is negative from both a macro and political point of view. Our analysis of liquidity in the system is very negative for Eastern Europe mainly due to high inflation that is eroding the availability of money in their system,” says Oliver Adcock, Portfolio Manager at NS Partners.
As a result, are forced to aggressively raise rates leading to a fall in money supply which chokes economic growth. “As our concerns about the global macro-outlook grow, we believe there is a hard landing coming and Europe will crunch along with it,” says Adcock.
Geopolitically there is also a problem in Europe – with the invasion of the Ukraine by Russia and the increasing hostility between Hungary and the European Union.
However, there are pockets of opportunity that could pay to watch closely, particularly in regions like Turkey. “2023 is going to be a big year with some very crucial elections coming up,” he says.
Adcock says there is huge opportunity in Turkey, particularly if Erdogan loses power. “This is a big moment for the Turkish market. It’s a market that has such depth and interesting stocks as well as a growing population. If they can get their monetary policy back into place and bring down inflation, we think there will be some real opportunities there.”
However, Adcock points out there are so many moving parts in Turkey so it’s crucial to wait for the right entry point. “We would look for the money supply to recover which is starting to happen, and a more stable political and macro environment. We would never tick the liquidity box before it happens, but it does give us space to be more confident and be ready to act when the time is right,” he says.
Should this occur, NS would initially look to buy stocks that would benefit from the improving liquidity flow in the market, rather than the more cyclical stocks that would benefit from the economic upswing. “The classic quality stocks to date have been the exporters but I’m not sure you would want to buy those in a recovery. We would more likely look to the high-quality domestic exposures like retailers,” says Adcock.
Next year (2023) is also a big election year in Greece and Poland. NS Partners are much more constructive on Greece and are currently overweight Greece in the portfolio. “The money supply is a lot better and there is more capacity in the market from a macro point of view,” says Adcock.
NS currently have two holdings in Greece. One of them is a company called Mytilineos. Interestingly the company is an aluminium smelter and a gas power producer but pushing ahead with a massive drive to decarbonise their business, including manufacturing green aluminium by using renewable energy. They also use a large amount of recycled aluminium and their power plants in Greece are by far the most efficient, allowing then to benefit from high power prices.
Poland is a market that has underperformed significantly so there might well be opportunity there too – but Adcock says it’s very hard to tell at the moment with the potential of big political changes coming up.
“We are always evaluating the regions with future potential and right now is a very interesting time to be watching Eastern Europe – and Europe as a whole,” he says.