Economic growth remains higher than average
The economies and financial markets in Central and Eastern Europe have faced stiff headwinds in recent years, such as the distortions caused by the pandemic, the war in Ukraine and related deterioration of relations between Russia and the EU, and runaway inflation. Despite these difficulties, however, the countries in this region are still on a good long-term growth path. Analysts project economic growth in the region to be around twice as high (on average) as in the “old” EU countries.
The attractive investment story for Central and Eastern Europe remains intact. The process of catching up with the “old” EU members is still moving forward, along with the gradual approximation to Western European income levels. At present, income levels in the Central and Eastern European emerging economies are at around 50 to 70% of the EU average, leaving plenty of upside for potential increases. At the same time, these countries profit strongly from the sizable EU financial assistance even though a large amount of these funds is being held back by the European Commission in the case of Poland and Hungary, due to political disputes. The process of economic convergence will probably mainly benefit the banking sector, consumer goods, infrastructure, and construction, along with some companies from the technology sector.
High rates of inflation are weighing on domestic consumption
In the last 18 months, high rates of inflation have seriously eroded real incomes for households in the Central and Eastern European countries and also weighed heavily on domestic consumption. In turn, the sharp interest rate hikes by the central banks to fight inflation have also been a negative factor for economic activity and investments. Much higher energy prices, the disintegration of business ties with Russia, and the general slowdown in the global economy are additional problems for the region’s firms and consumers.
Nevertheless, broadly speaking the economies there have held up better than originally expected, and further improvement is on the horizon for the coming quarters. The rates of inflation are dropping sharply and even though they will remain well higher than the central bank targets for quite some time, the trend is good. The upcoming turnaround in interest rates should provide support for investment and consumption. On the whole, the headwinds from monetary policy should die down and over the medium term this factor may even provide some support for the economy again.
Equity valuations at historically cheap levels
In part due to the difficulties faced in recent years, equity valuations are at historically low levels (P/E ratio of around 7) and are far below the long-term average (> 11). Dividend yields are often 5% and higher. To some degree of course, these lower valuations are due to higher risks, for example ones related to (geo-)political developments. At the same time, they also just partially reflect the promising risk-return profile in a region that tends to be overlooked and underestimated by international investors and is simply waiting to be (re-)discovered.
The bond markets have also reacted positively to the development of inflation in recent months, with bond prices rebounding quite strongly since the final quarter of 2022. At present, bonds are moving on a flat trend with significant volatility. In parallel, nominal yields are still quite high in sharp contrast to the yield levels around zero that were still the order of the day not too long ago. Both hard currency and local currency bonds feature very handsome risk-return constellations over the long run.
Decades of fund expertise in Central and Eastern Europe
As one of the first movers in the early 1990s and a major international player, Raiffeisen Bank International AG (RBI) was a defining force on the financial markets in certain CEE countries and – together with RBI’s network banks – Raiffeisen Capital Management also did pioneering work in fund sales in some of these countries.
In February 1994, Raiffeisen Capital Management launched an equity fund that invested in the markets of Central and Eastern Europe for the first time: Raiffeisen-Osteuropa-Aktien. The focus was on the countries that were still described as “transition economies” at the time, which were attracting more and more attention from investors in the West due to the fall of the Iron Curtain. For decades, this fund was the poster child for Raiffeisen Capital Management’s expertise in Eastern Europe and aside from some brief episodes of turbulence it has been a great success.
Investment story still intact
A decisive moment occurred for the fund last year: As a result of Russia’s invasion of Ukraine, trading in the fund had to be suspended for more than one year due to its Russia exposure but in April 2023 it once again became possible to buy and sell fund units (without the Russia component).
This notwithstanding, investors still clearly view Eastern Europe as an attractive investment story. And indeed, even without Russia, this market continues to offer very interesting investment opportunities. On the one hand, the region is an important market for internationally active Western companies, including many from Austria. On the other hand, many companies from Central and Eastern Europe are internationally active, important players in various fields of business. As an asset manager with a keen interest in sustainability, Raiffeisen Capital Management deems it very important that this region also features an increasingly broad selection of sustainable companies, allowing it to offer investors suitable investment opportunities. Much has occurred in this regard as well in recent years, as the range of ESG-eligible investment options is expanding year after year. With the upcoming transition of Raiffeisen-Osteuropa-Aktien to an ESG investment approach, these opportunities will be exploited.
Investments in funds are subject to the risk of price fluctuations and capital losses. The investment strategy permits the fund to predominantly (relative to the associated risk) invest in derivatives.The fund exhibits elevated volatility, meaning that unit prices can move significantly higher or lower in short periods of time, and it is not possible to rule out loss of capital.