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Emerging Europe Is a Quiet Star
02/08/2010 12:00 pm EST
John H. Christy III, editor of Forbes International Investment Report, likes an ETF that covers Eastern Europe, whose markets have been outperforming this year.
From a regional perspective, Eastern Europe has been one of the few bright spots since the start of the year.
MSCI’s EM Eastern Europe index rose 1.8% in the month of January. This compares to losses of 6% for Asia, 9% for Latin America, and 6% for emerging markets as a whole.
One of the key drivers has been Russia, an important constituent of the regional index, and is up 2.4% [so far in 2010]. The Czech Republic, Poland, and Hungary have held their own, ending January in either positive territory or losing less than the broader emerging markets index.
Eastern Europe’s apparent relative strength could simply be the result of other markets correcting more sharply. But the investment case for the region still looks pretty interesting.
Let’s take the SDPR S&P Emerging Europe (NYSE: GUR) exchange traded fund as an example. The fund holds a basket of 84 stocks, mostly in five countries. At 64% of the fund, Russia is the biggest weight, followed by Turkey at 16%. Poland makes up another 11%, and Hungary (5%) and the Czech Republic (4%) account for the remainder.
It’s an unusual mix. Many folks would argue that Turkey doesn’t quite belong. And there is obviously a very strong bias towards Russia—for better or for worse.
Although it may be a strange recipe, the portfolio’s stats look pretty good. Average price-to-earnings multiple: 10.1x. Price to book ratio: 1.2x. Dividend yield: 2%. And estimated three- to five-year future earnings growth of 14% [annually].
That’s a pretty compelling mixture of growth, value, and income. But it does come with plenty of risk-and that brings us back to Russia. The fund’s top two holdings—OAO Gazprom (OTC: OGZPY) and Lukoil (OTC: LUKOY)—account for 25% of the portfolio. All told, energy accounts for 42% of the fund. So if you decide to invest in the fund, you’d better be pretty darn bullish on oil and gas, particularly the Russian producers.
Financials—mainly banks—also figure prominently at 23% of the fund. Eastern Europe has had its share of financial turmoil, but this may be abating. In an interview from Davos, the CEO of Italy’s UniCredit told Reuters that he expects bad loans in Eastern Europe to peak this year and that the situation is “normalizing.” His opinion is noteworthy because UniCredit is the largest lender in Eastern Europe.
While there is plenty of risk with GUR, it seems worth taking over the long haul.
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