Where’s the growth in the EU? In its emerging markets
It’s taken as gospel that the EU has become sclerotic and unable to grow. Yet underneath the surface are many fast-growing nations full of innovative companies and exciting opportunities.
Like most of the advanced Continental economies, some developing nations in central and southeast Europe were hit hard by the fallout of the Global Financial Crisis. They seem to have been unfairly pigeonholed since – especially as Poland rode out the Great Recession with no GDP downturn at all!
These smaller members of the world’s largest trading bloc have benefited from large amounts of support from the EU, which has offered big sums to improve and expand infrastructure over the past couple of decades. High-speed rail networks, new motorways, higher capacity sea and river ports, faster internet and power energy projects. They’ve invested in schooling and vocational training as well, creating highly skilled – often multi-lingual – workforces.
Many of these well-trained workers have left to work abroad in the past decades and this tradition continues. However, most of them tend to send money home, where it helps fuel economic growth and provide capital for new ventures and improvements to property.
In some ways, big shifts in how advanced nations view and welcome immigrants looking for a better life – or not – has meant more of these skilled people staying at home and building businesses there. It has also encouraged others to return from abroad, using the cash they’ve amassed to spend, buy property, and invest in local companies – or themselves.
Emerging Europe has flown over the past 5 years, putting its bigger neighbours to shame
When you invest your capital is at risk and you could lose some or all of your investment. Past performance should not be seen as an indicator of future performance.
Leveraging inner strengths
It’s not just overseas cash that’s helped drive these markets. Over the years they have implemented smart reforms that have made them self-reliant, more efficient and boosted access to credit and entrepreneurialism.
With high potential returns on offer and the cost of equity and borrowing relatively low, investment has been extremely attractive. And we think this is likely to persist for some time.
The flow of outside investment has helped drive expansion of associated industrial companies. For example, the roll-out of clean-tech and smart energy networks has been a boon to electric vehicle manufacturing. Bold transport plans have helped create logistics hubs that deliver to neighbouring markets as well. And next-generation telecom infrastructure has helped drive digital businesses and e-commerce. Companies like Greek gambling business OPAP and Hungarian pharmaceutical manufacturer Gedeon Richter should benefit as disposable incomes continue to rise and domestic demand stays robust.
As you would expect, this flow of investment, skills and new ventures has boosted the banks and insurers that support and underwrite business and consumption. Polish bank PKO, Greek lender Piraeus Bank, and Romania’s TLV have made the most of rising credit demand, while also improving their non-performing loan ratios, and paying attractive dividend yields.
Earnings growth is supported by rising productivity, expanding consumer credit, and increasing capital efficiency. Regionally, these markets also enjoy partial insulation from global geopolitical volatility through Euro-linked monetary stability and implicit support from Germany’s central bank.
In sum, we think a combination of pro-growth policy tailwinds, disciplined economic management, and well-positioned companies underpins a strong case for overweight exposure to central and southeast Europe in the year ahead.
