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18 July 2011

David Reid, analyst for the Eastern European Trust, finds opportunities in Eastern Europe amidst the European sovereign debt crisis: ?Over recent days the European sovereign debt burden has once again weighed on markets. There are indeed valid reasons for concern - sovereign balance sheets are not easily or quickly fixed - but as is typical in such situations these worries are often indiscriminate and throw up opportunities for more perceptive investors. ?In particular, we think that investors often wrongly confuse the 'Peripheral Europe' of Greece, Ireland and Portugal with Eastern Europe. They are not synonyms, and for good reason. ?Russia, Poland and Turkey are the largest Eastern European markets and all have public debt burdens less than half that of Greece, more similar to the likes of steady Norway and Denmark. Russia in particular has almost negligible public debt and over $500 billion dollars of foreign exchange reserves. ?In the 5 year period up to 2010 Russia and Turkey actually cut their public debt/GDP ratio, whilst Poland's rose by just 4%. Meanwhile in the UK it ballooned. Whilst some countries talked about prudence the Eastern European countries were actually practising it. ?Even the smaller emerging markets that suffered most in the financial crisis of 2008 are flattered by a comparison. Hungary has moved from a twin budget and current account deficit in 2007 to a twin surplus in 2011 following a tough but successful austerity program, a very rare example in the world. It is now a safer country to lend money to than Spain, according to the credit default swap markets. ?Eastern Europe is the cheapest emerging market region on a price-to-earnings basis, at a 30% valuation discount to both Global EM and World markets. Perhaps surprisingly to some, it has a better long-term track record of earnings-per-share growth than Global EM, and with earnings forecast to increase by over 20% this year the investment fundamentals remain strong.? ENDS

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