Russia’s annexation of the Crimean Peninsula and the possibility of further action taken in Ukraine and other former Soviet Bloc nations have led many investors to wonder, understandably so, what impact the crisis has had on investment opportunities in Eastern Europe. To unravel these concerns and more, U.S. Global’s Director of Research John Derrick caught up with Gavin Graham of VoiceAmerica’s “Emerging and Frontier Markets Investing” program.
Below you can read some of the interview highlights, in which John speculates on who were the winners and losers in the aftermath of the Russia-Ukraine conflict. He also touches briefly on the violence that has recently erupted in Iraqi Kurdistan and what effect it might have on neighboring Turkey.
Which European countries have the greatest potential and have benefited the most from what’s been happening?
I think Poland’s been a beneficiary. It’s used as a safe haven in the region: stable economy, stable political environment. It’s benefited from the European recovery and doesn’t have that much trade with Russia.
I think Turkey has benefited, more from a money flow standpoint. If you were worried about what was going on in Russia and some of the longer-term implications, I think money flowed into places like Turkey. Money also flowed into places like Greece because a lot of the international investors tend to be regional investors, and within that region, there are shift allocations into places like Turkey, which has been a very strong performer this year. Part of that money is coming out of Russia.
That’s a very fair point because, as you say, if you’re running a dedicated Eastern European fund, Russia’s been overwhelmingly the largest weight within it, though a fair number of people were underweight even before Crimea because of concerns about governance and the like. Nonetheless, where are you going to go? Turkey is obviously a major market. Some of the reasons you like it include the demographics as well as the government’s pro-business attitude.
Exactly. If you just take a step back and look at the long-term secular growth, the demographics are very positive. There’s an entrepreneurial culture in Turkey: good government policies generally speaking toward business development, toward foreign investors. Basically business can get done, businesses can be created, and all those kinds of things that most Americans can relate to.
It’s still an emerging market country, and they’ll do things that you’ll look at and scratch your head, like banning Twitter or Facebook. But the political situation has definitely calmed down, and so I think the long-term secular story for Turkey is probably the best long-term secular story in the region. That’s what you want to hitch your wagon to over the long run.
Now I know that maybe one or two eyebrows will have been raised by you mentioning that Greece has been seen as a safe haven, but you are very right and very early in picking Greece as a market that had some very positive changes taking place. Do you want to just briefly recap where we are now?
Six years into a recession, Greece is finally starting to see the light at the end of the tunnel. They’ve made some significant structural changes. Essentially the banking system has been consolidated down. There are now four major players there. All in the last month, they actually have recapitalized, raised money. That put some pressure on the Greek market and banks over the last month or so, and it puts them on a much firmer footing. The banking system can function more properly, and you can actually start seeing real growth.
The European Central Bank (ECB) has been very supportive. The ECB announced a TARP-like program where you can get long-term funding—essentially a four-year repo currently at 25 basis points. That’s going to be positive for peripheral banks in general whether it’s Greece or Spain or Italy.
They’ve also talked about doing a securitization program where you get some kind of quantitative easing. All those kinds of incremental things are very positive for Greece. After six years of recession, they’re finally starting to come out of it. It’s just like a natural cycle. It doesn’t stay bad forever. That’s going to continue for the next 12 to 18 months.
Which is about as long as one can look ahead, especially with exciting things like the Ukrainian crisis happening. Briefly, in terms of those countries, which don’t look as attractive? Presumably the Baltic republics, which are seen as being more vulnerable, given what happened with Crimea and Ukraine?
Definitely. There’s concern there that Russian expansionism is going to continue. Will NATO really defend those countries if Russia tries to re-exert its influence in those regions? I think those have been areas that have been hurt by the crisis because they’re viewed as the next dominoes, if you will. Obviously those are not big markets and have limited investment opportunities, but definitely I think they’ve been negatively impacted. People aren’t really sure what the Russians’ ultimate goals are here, what they’re really trying to accomplish: are they done, or are they trying to recreate the Soviet Union?
Just to finish up, in terms of talking about military action, you were mentioning earlier about what’s been happening in Iraq where an al-Qaeda-linked group has taken over the second major city, Mosul, in Iraq and led to hundreds of its inhabitants fleeing. Maybe that’s going to have some effect on next-door neighbor Turkey?
The Turkish market is down about 3 percent today, and currency’s down 1 percent or so. Obviously it sounds like the situation in Iraq is deteriorating pretty rapidly. That’s a pretty significant development. It just raises a lot of questions about what’s happening there and what’s going to be the impact for Turkey. There’s a fair amount of trade that goes across there—oil pipelines that they’ve finally got up and running, particularly in the north in the Kurdistan region, sending oil to Turkey. There’s still some controversy about who’s going to buy it because they don’t have an agreement with the central government.
Nevertheless, there’s oil and gas and all those kinds of things that are good for Turkey in the long run. I look at today’s developments as probably likely a buying opportunity in Turkey.
Indeed, having reduced our exposure in Russia following the events in Ukraine, our Emerging Europe Fund (EUROX) now invests the largest percentage of its assets in Turkey (24.29 percent), followed by Poland (14.75 percent) and Greece (11.80 percent).
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