Jupiter Emerging European Opportunities – research update

Central and Eastern Europe might not be at the forefront of investors’ minds when thinking about an investment in emerging markets. Looking at the long-term picture though, the region exhibits many of the qualities that have made ‘traditional’ emerging markets, such as China and Brazil, popular amongst investors taking higher risks, including lower levels of debt and increasing consumer spending.

The Jupiter Emerging European Opportunities Fund invests across the region and includes Turkey and Russia in its investment universe. These are volatile markets though, with Russia in particular tending to be either one of the best or worst performing markets in the world. The fund experienced sharp falls during the credit crunch, partly owing to a large weighting in Russia which fell heavily.

The fund has since bounced back strongly, and fund managers Elena Shaftan and Ingrid Kukuljan are keen to point out the tremendous long-term growth prospects on offer.

Please remember past performance is not a guide to the future. (Source: Lipper Hindsight)

Over 50% of the portfolio is currently invested in Russia, which they describe as the world’s treasure chest. It is resource rich with large reserves of precious metals, including around 15% of global gold reserves, as well as oil, gas and other commodities upon which the world depends. However, in a post credit crunch world, the economy is far from relying purely on commodities to drive growth.

Russia has much lower levels of both government and household debt than many major developed economies, as well as leading developing economies such as China, India and Brazil. The middle class is growing and wages are rising, increasing demand for everything from housing and cars to clothes and electrical goods.

Therefore, as well as holding Gazprom, the largest extractor of natural gas in the world, they also have over 4% of the portfolio in Mobile TeleSystems, the biggest mobile phone operator in Russia, which should benefit from increased mobile phone ownership.

It’s a similar story across Central & Eastern Europe which has become the main hub for Western European companies looking to cut costs and outsource operations. Whereas China produces cheap goods in bulk, the comparatively well educated population of Central & Eastern Europe lends itself more to the production of luxury goods. More specialised labour commands higher wages, leading to higher living standards and increased demand for a whole range of goods and services.

Within Central and Eastern Europe the managers have over 15% invested in Turkey where they are positive on the financial sector. Garanti Bank is the second largest holding in the portfolio at just under 8%. They are also positive on the Polish economy where high levels of consumer spending helped the country avoid recession completely.

Elena Shaftan and Ingrid Kukuljan run a highly concentrated portfolio which allows them to focus purely on their best ideas, but such a strategy can increase risk. As more companies in the region look to float, they also expect to have an increasing array of opportunities from which to choose.

It is sometimes easy to view Europe as a homogenous region as opposed to the unique and diverse grouping of countries that it really is. While the economies of Central and Eastern Europe are not for the fainthearted, investors comfortable taking the additional risk associated with emerging markets may benefit from what is in our minds the region’s excellent long term growth potential. This fund remains on the Wealth 150 list of our favourite funds in each sector.