Conviction based approach uncovers hidden gems in Eastern Europe
Leading up to the fifth anniversary of BlackRock’s management of the BlackRock Emerging Europe, portfolio managers Sam Vecht and David Reid highlight the investment case for emerging Europe and provide strong arguments why investors should remain positive about the region.
Six months ago, the investment approach and name of the trust changed from the Eastern European Trust to BlackRock Emerging Europe. Under the new policy the number of holdings has been reduced to a focused portfolio of between 20 and 30 stocks (previously from 45 stocks). This change has enabled managers Sam Vecht and David Reid to adopt a more conviction based approach, looking beyond the large companies which dominate the benchmark in favour of the best ideas in the investment universe, unconstrained by their index weighting. This wider perspective provides the potential to uncover “hidden gems” across emerging Europe and deploy capital where it is best placed to generate returns over the long term.
Sam Vecht, portfolio manager commented on the outlook for emerging Europe: “The emerging European region includes some of the cheapest shares in the world and many stocks in the portfolio are growing earnings at 10%-15% a year.
“Over the last six months emerging European markets have tended to follow the mainly negative market moves seen across global emerging markets, rather than move in tandem with their western European peers. The performance of emerging market equities was heavily influenced by external factors, in particular the prospect of the US tapering its quantitative easing program. The result is that many companies in emerging Europe are positioned to benefit from the improving economic environment yet trade on attractive valuations.
“We are particularly excited by the prospects for companies such as Yandex and Mailru, dominant leaders in Russia’s fast-growing internet space, Dragon Oil, one of the cheapest oil companies worldwide with excellent production growth potential, and Globaltrans, a highly cash-generative railway transportation firm.
Sam Vecht continued: “The macroeconomic environment in Russia has recently been one of sluggish growth, but this looks set to gradually improve over the next year. A trend of increasingly favourable dividend policies has seen dividend yields rise above global emerging markets averages for the first time in recent history. This underlines the growing appreciation of the objective of shareholder value in the country as the government and corporates aim to boost international investment.
“We have consistently cautioned over recent years that Turkey’s current account deficit was an economic vulnerability that could be exposed by a higher global interest rate environment. With the market having fallen 40% from its 2013 peak, and valuations returning to multi-year lows, Turkey is now starting to look a much more interesting place for the long-term investor. Many Turkish stocks, including leading banks like Halk Bank, are trading at close to book value or below.
Sam Vecht concludes: “Russian and eastern European markets benefit from flexible and dynamic economies, with undervalued currencies and educated and skilled workforces, allowing the countries of the region to remain competitive in a globalised market. Despite the attendant risks, valuations are still attractive given many of these risks are reflected in current prices. The long-term outlook for emerging Europe is bright, investors should benefit from the fast growth, high returns and low valuations the region has to offer. We believe eastern Europe is on the cusp of rediscovery.”
Since BlackRock took over management of the fund in 2009, the net asset value has increased by 78.6%*compared to MSCI Emerging Europe 10/40 index at 61.5%.