Russia and Turkey presenting investment opportunities, according to European fund manager

Emerging markets in Eastern Europe such as Russia and Turkey are experiencing a bounce back after the global financial crisis and are worth looking at for investment opportunities, it is claimed.

Economic recovery is gaining traction and domestic demand is a strong driver of growth, according to Liesbeth Rubinstein, manager of Invesco Perpetual’s Emerging European Equity Fund.

‘In fact, we continue to see some very encouraging economic data releases, for example retail sales in Poland for February rose by 13% year on year, which compares favourably to similar releases in the UK. Also, the proximity of the region's manufacturing base to the Eurozone makes the Czech Republic, Hungary and Poland an important beneficiary of any German super cycle,’ she said.

While the Eurozone and the UK are still working off their debt hangover, public finances in emerging Europe are on a much sounder footing, she believes, pointing out that both public and private sector debt in the region are low. ‘Households have considerably less leverage than their western European neighbours, and accessing the domestic consumer in this region we believe still represents a multi year catch up opportunity,’ she said.

While living standards have certainly risen across the region over the past five to 10 years, labour costs in Eastern Europe are still considerably below the European Union's average. ‘This explains the trend of multinationals such as Dell and Fiat relocating to this region. These companies are opening plants and committing capital, attracted by cheaper labour costs versus their home markets as well as business-friendly tax regimes and flexible labour laws. In our view, this dynamic will support the catch-up in living standards for many years to come,’ she explained.

A plus point for Russia is the country’s natural resources and last year Russia struck a number of strategic tie ups with China, providing access to natural resource reserves in exchange for cheap financing. ‘This year, the theme is gaining momentum, as western multinationals are now starting to get in on the act. We have seen many western multinationals taking stakes in Russian energy companies, for example there have been landmark deals between BP and Rosneft and also Total and Novatek. We believe this is a clear signal that Russia has become and is becoming even more open for business. We expect to see a greater number of strategic alliances in the future, which we believe will lay the foundation for further cooperation,’ said Rubinstein.

‘On another level, FIFA's decision to allow Russia to host the World Cup is another significant vote of confidence in the country. Additionally, reform and privatisation are further steps on this route towards economic glasnost. The government remains committed to reform as it will encourage direct investment,’ she added.

She also believes that Turkey offers a cheap and broad based investment opportunity. ‘The country has favourable demographics and a strong and healthy banking system. It is also the industrial base for the Eurozone, with companies like Fiat and Ford having their most efficient and profitable production and assembly plants located in Turkey,’ she said.

‘Policymaking in this country has been a success. After a history throughout the 1990s of boom-bust economics, the last five to 10 years have seen a big success in Turkey's disinflation programme. We are even looking at the potential for Turkey to be upgraded to investment grade this year. At a macro level, there are certainly parallels to Brazil, whereby the lower interest-rate backdrop in the country has really been transformational for allowing companies and households to plan their investments with greater confidence,’ she explained.

Despite last year's relatively strong performance, the region is still under-represented in global portfolios and, in terms of equity inflows, has lagged other emerging market regions, she believes. ‘In our opinion, discount valuations do not reflect the inherent strengths of the region. We believe this will change as more investors realise the real potential of this asset class,’ Rubinstein added.