Investing in Emerging Europe – a bumpy road worth taking?

November 2019 marked the 30th anniversary of the fall of the Berlin Wall – the infamous Cold War symbol that divided capitalist Western Europe and communist Eastern Europe.

Several decades after the collapse of communism in the east though, an economic division still remains. Countries in the west like Germany, France and Switzerland are seen as stable, developed economies, while those such as Poland, Hungary and Bulgaria are often viewed as emerging ones.

Eastern Europe is often seen as the ‘factory of Europe’, given it’s rich in natural resources with a large, low-cost labour force. But the region’s population are becoming increasingly skilled, and income levels are on the rise.

So while most Eastern European countries have smaller, less-advanced economies than those in the west of the continent, lots of them are growing at a faster rate.

In 2019 Eastern European economies grew nearly twice as much as Western ones. Over the next five years nearly every Eastern European economy is expected to grow faster than those of Western Europe, as well as the UK and USA.

GDP growth forecasts (%)

Source: IMF.org

Opportunity in the east?

Over the long-term Emerging Europe has often done better than the broader European (excluding UK) stock market – growing 284% versus 224% respectively over the last 20 years*. Remember that’s not an indication of future performance.

The chart below shows it’s been a much bumpier ride for investors in Emerging Europe though. As with any emerging markets, investors should be prepared to accept they are higher-risk, there will be increased volatility and only invest for the long-term as part of a diversified portfolio.

Remember, all investments can fall as well as rise in value, so you could get back less than you invest.

20-year performance of Emerging Europe

Past performance is not a guide to the future. Source: *Lipper IM to 30/11/2019

The forgotten middle

For all its potential though, the region’s often overlooked by investors either looking closer-to-home in Western Europe, or further afield in Asia.

Eastern Europe makes up around 5% of the broader European (ex UK) stock market, so naturally most investors focus their efforts on the larger, developed part.

When it comes to investing in emerging markets, lots of investors prefer China and India. While it’s true those countries are predicted to achieve even higher growth, Emerging Europe has some great prospects and could be a useful diversifier to Asian and other emerging market investments.

Another potential turn off has been the type of companies that make up the Eastern Europe stock market – oil and gas companies form around half. A big part of that’s down to the dominance of Russia in the region, given the Russian economy’s reliance on natural resources.

There are also big portions in other unloved sectors like banks, mining, telecoms and utilities. While these sectors might not be everyone’s cup of tea, they could still provide investors with long-term growth potential.

Barings Eastern Europe

Barings Eastern Europe is one of only a few funds specialising in the region. They’ve found the most opportunities in Russia, which is why more than half the portfolio is invested there, and in the financial and energy sectors.

They think the Emerging European market is attractively-priced compared to the Developed European one. In their view, investors under-appreciate the potential despite the improving economic trends.

The fund isn’t on the Wealth 50 list of our favourite funds as we prefer other managers investing in emerging markets.

Past performance is not a guide to the future. Source: *Lipper IM to 30/11/2019

More about Barings Eastern Europe including charges

Barings Eastern Europe Key Investor Information

This is not advice, if you’re not sure if an investment is right for you, please seek personal advice.