'Leaner and Stronger' Eastern Europe a Buy: Analyst
In 2008, Eastern Europe was in the throes of a major financial crisis. Burdened with public and private debt, Hungary, Latvia and Romania had to be bailed out by the IMF; they faced severe austerity measures and high unemployment. Fast forward three years and Eastern Europe seems in much better shape, while the West faces the most serious financial challenge since the establishment of the European Union.
Now, one analyst says Eastern Europe has learnt its lessons and has re-emerged leaner and stronger, which is why investors should go back and invest in the region.
"The big thing is that they did their homework, they were pushed by the IMF, they were pushed by foreign investors, so they have deleveraged," Marcus Svedberg, Chief Economist at Eastern Europe-focused asset management firm East Capital told CNBC on Friday.
Svedberg believes fiscal consolidation, coupled with low debt levels and low inflation in some parts of Eastern Europe provide an attractive mix for investors. While growth in the West has stalled, Svedberg said some of the stronger countries in Eastern Europe were now growing close to their potential. Poland, for example, grew 4.3 percent in the second quarter over the previous year.
"I would say Poland is one of the better economies, not only in Eastern Europe, but Europe as a whole. It was the only EU economy not moving into recession back in 2008," he said.
Eastern Europe's equity markets lack the size and depth of the West, and Svedberg said investors should steer clear of smaller markets such as Slovenia or Lithuania. But, he added, a lack of liquidity wasn't an issue in the bigger Eastern European markets.
"Look at the big ones, look at Russia, Turkey, Poland and even Czech Republic and Hungary. You have good liquidity, even if you're only moving down to second tier stocks, mid-caps. So, it's not a general issue," Svedberg said. "Also, lately, volumes have been quite good, especially in Turkey and Russia."
Svedberg is especially bullish on stocks in Russia, whose benchmark RTS index trades at a forward price to earnings (P/E) ratio of just 5.1.
However, these markets are not without risks, given their less developed capital structures and opaque political systems, Svedberg added. Russian stocks for example fell 77 percent from the peak to the lows in 2008, during the global financial crisis.
"The risks are high. It's difficult to navigate in some of the political environments in these countries. But, if you're a long-term investors, you're dedicated, I think you can make fairly sizeable gains," he said.