Emerging Europe poised for sustainable long term growth

ING Investment Management (ING IM) believes that as Emerging Europe prospers, it will also underpin growing corporate profits and cash flows. This developing business environment will, in turn, allow companies the opportunity to further enhance their business models, implement best practices and boost shareholder returns.

Nathan Griffiths, senior investment manager, ING IM said: “From a growing middle class in Russia to the young and vibrant population of Turkey we see an environment not weighed down by fiscal uncertainty and austerity initiatives demanded by Western Europe. There is also a solvent financial system, strong government finances and growing credit penetration, which will bring sustainable growth to the countries of Emerging Europe.”

Looking at specific areas, ING IM highlights that a growing middle class will evolve in these areas as more jobs are created, wages grow, wealth spreads and consumer spending begins to reflect the patterns and choices seen across the developed world.

Griffiths continues: “Turkey’s young population underpin a strong domestic growth environment while geographic proximity to nearby markets across the Middle East and Africa offers cross border potential. Turkey also benefits from a developed and well educated corporate sector eager to seize opportunities and expand.

“Meanwhile, Russia is a beneficiary of Asian prosperity and growth as a leading producer of energy and agricultural products. Also key but less appreciated perhaps is the growth of the Russian middle class that will drive domestic consumption and credit growth. Reform of financial markets will increase foreign capital and investment. Russia will become a better place to do business as bureaucracy and corruption decline.

“Central Europe continues to benefit from convergence with the EU but with a stronger financial system and solvent fiscal position. While austerity in Western Europe will inevitably lead to slower growth and limit investment spending in the region, longer term trends in Central Europe such as rising income levels and the ongoing development of business models continues to provide interesting investment opportunities.”

With regard the asset markets in Emerging Europe, ING IM expects them to remain sensitive to global economic developments, largely due to the region’s relative need for capital and strong ties with commodity movements. Continued reform progress in the shape of more privatizations, improved corporate governance and greater shareholder protection can reduce the sensitivity to global risk appetite and provide less volatile returns.

Nathan Griffiths concludes: “Despite this sensitivity, Russia stands out due to its relatively low exposure to the problems currently experienced in the Eurozone, while its exposure to the energy commodities market will continue to stand firm. Furthermore, valuations in Russia are attractive and its macroeconomic performance continues to show strength.

“In Turkey, equities continue to be driven by both external and domestic developments, with the Eurozone dominating the external arena while inflation and monetary policy dominate domestically.

“Markets across Central Europe, such as Poland and Hungary, have become increasingly intertwined with Western Europe and, as such, developments in the Eurozone are likely to have a greater impact on these countries than elsewhere. ING IM notes that equity valuations across the region remain attractive in comparison to global and emerging market peers, although markets remain below pre-2008 levels when compared to Global Emerging Markets.”