The Dark Horse of Emerging Markets

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club
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When most investors think about emerging markets - to the extent that they think about them at all - they generally picture places like Mexico, Brazil, China or India.

But how about Eastern Europe?

My guess is 99% of American investors have never even considered putting capital to work there.

But perhaps it’s time.

On last month’s Oxford Club Beyond Wealth River Cruise on the Danube, we visited Slovakia, Austria and Germany. But we kicked things off in Budapest with a pre-conference event at the beautiful Corinthia Hotel.

There we heard from a number of local experts, including my old friend Nick Vardy.

Few, if any, individuals in the investment industry have Nick’s knowledge and experience. He graduated from Stanford - with honors and distinction - in both economics and history. He also earned an M.A. in modern European intellectual history.

After winning a Fulbright scholarship, he earned a Juris Doctor degree at Harvard Law School where he was editor of the Harvard International Law Journal.

He has been a regular commentator on CNN International and the Fox Business Network. And he is an associate of the Adam Smith Institute in London, a nonpartisan think tank that promotes free market ideas around the world.

Nick and I have a lot in common. We are both fitness enthusiasts and classical music lovers. We are both optimists who believe there has never been a better time to be alive. And we agree that today’s emerging markets are among the cheapest and most attractive assets on the planet.

During his presentation, Nick made a persuasive case for putting money to work in Hungary and Eastern Europe.

Hungary, for instance, is a nation of roughly 9.9 million people, and purchasing power per capita is just $28,965. (It’s $52,704 for Americans.) The nation is roughly the size of Michigan but produces only about a quarter as much.

Yet there are good reasons to invest here.

Eastern Europe is converging with Western Europe. State control is out. Free markets are in.

A quick look around Budapest makes this abundantly clear. The city center is full of old, gray, faceless, Soviet-style buildings. When it was part of the Eastern bloc, no one considered aesthetic qualities. After all, few could afford a home. You were lucky just to have a space in an apartment building. Any apartment building.

Today, however, consumer preferences rule supreme, as they do in all market economies. New homes, stores and offices are attractive and modern, especially as you get closer to the Danube.

This trend will only accelerate in the months and years ahead.  Hungary joined the EU 14 years ago. And as it - and neighboring Eastern European economies - integrate with Western Europe, growth is virtually assured.

Already, Eastern Europe’s economies are growing at a 3.2% rate. That’s twice as fast as the EU as a whole... and the U.S.

Eastern European stock markets are among the cheapest in the world. The S&P 500, for instance, currently sells for 25 times trailing earnings. Hungary sells for just 10.7 times trailing earnings.

To put that in perspective, the U.S. market could drop by half and still be more expensive than Hungary, even though Hungary is growing twice as fast.

It’s not easy to invest in this part of the world, however. There are no U.S.-listed stocks from Eastern Europe. (Although a handful trade over the counter.)

So consider the SPDR S&P Emerging Europe ETF (NYSE: GUR). This exchange-traded fund tracks a market cap weighted index of stocks based in Russia and Eastern Europe. It’s small. (Total assets are only $53 million.) It’s relatively illiquid. And roughly half the fund is invested in Russia.

However, it gives you access to some of the most inexpensive equities in the world. And these markets have entered a quiet uptrend.

(Incidentally, Nick has all sorts of interesting things to say on a variety of investment subjects. To read his global perspective, click here.

If you consider yourself a contrarian, someone who buys assets when they’re out of favor and sells when everyone else is clamoring to get aboard, consider putting some money to work here.

When the rest of the world discovers the transformation that’s taking place in Eastern Europe, you’ll be glad you did.

Good investing,

Alex

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