Will Bartleet, CIO and Portfolio Manager of Pacific Multi-Asset
Opportunities in Eastern Europe
Contrarian investing is often thought of as being like catching a falling knife: looking for assets that are tumbling and heroically buying into them at the bottom. Like all dangerous games, you can sometimes play and look like a hero, but more often than not you come off worse for wear. Our approach to contrarian investing is not to fight the herd, but rather to look elsewhere for great opportunities that are just off most investors’ radar screens.
One equity market that meets this approach is Eastern Europe, comprising of Poland, Hungary and Czech Republic. Not part of Europe, so ignored by European investors, but not big enough to grab the full attention of many emerging market investors.
These countries have everything an equity investor could wish for: robust economic growth, stable but low inflation with attractively valued equity markets. They are growing at a pace of around 4% in 2017, benefitting from the strong economic recovery in Europe. However, inflation is well under control, at around 2%, below their central banks’ targets. Only the Czech National Bank looks set to raise interest rates, and here only a at a modest pace as inflation is still only running at 2.4%.
Most importantly for equity investors, their stock markets are trading cheaper than most emerging markets both in absolute terms and compared to their local bond yields and earnings are growing strongly. No investment is perfect, with Poland still working through the problems caused by Swiss Franc mortgages taken up before the financial crisis. But there is a silver lining to this too: consumers have been reluctant to borrow. As a result, these countries have some of the lowest levels of household debt to GDP in Europe.
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