Eastern Europe

Tuesday, December 22, 2015 - 09:51

The Kremlin

Vladimir Putin remains a major thorn in the side of the West, as Russia takes an ever-more assertive stance in global affairs.

Moscow has annexed the Crimea, asserted what it argues are its rights in Ukraine and launched air strikes on Syria, to take on both ISIL and maintain its support for Damascus’ President, Bashir-Al Assad.

This all helps to detract attention from an economy that is mired in recession and would welcome a rebound in the oil price, although Putin’s standing at home will have been further enhanced by the pivotal role he played at November’s G20 summit in Turkey.


President Putin is not the only one writing headlines.

Romania’s Prime Minister Victor Ponta resigned in November as he faced indictment on charges on forgery, money laundering and tax evasion. The independent Dacian Ciolos replaced him, having been appointed by President Klaus Iohannis to form a new, entirely technocratic government.

Meanwhile, Hungary, Croatia and Slovakia continue to clash with Germany on the issue of migrant quotas.

The situation is equally febrile in Turkey. June’s election resulted in a hung Parliament and public rejection of Racip Tayyip Erdogan’s desire to change the constitution and establish an executive Presidency.

Blue Mosque

Yet November’s follow-up ballot delivered a crushing win for the Justice and Development Party (AKP) that has Erdogan’s backing as the Turks appeared to take a more favourable view of their President’s increasingly authoritarian approach.

Presidential or parliamentary elections are due in Slovakia, Estonia, Lithuania, Romania and Montenegro in 2016 but the most important vote is likely to be Russia’s parliamentary poll.

This is due in December but it could be brought forward to the autumn as Prime Minister (and former President) Dmitry Medvedev seeks to cement the United Russia party’s dominant position in the Duma.


A collapse in the Turkish Lira, a debt restructuring (and haircut) in Ukraine and a deep recession in Russia mean 2015 may not linger in the memory for the right reasons for investors in Eastern Europe.

Russia seems in better shape than Turkey or Ukraine for 2016, even if it would welcome any boost to its coffers from rising oil prices and GDP is still shrinking, weighed down by Western sanctions relating to Ukraine.

Elvira Nabiullina was named Central Bank Governor of 2015 for her handling of Moscow’s economy, as she helped to manage precious foreign exchange reserves, let the rouble float rather than insist upon capital controls and decisively hiked interest rates to reassure the bond markets.

Sanctions, weak oil and warfare are weighing in Russian GDP

Sanctions, weak oil and warfare are weighing in Russian GDP

Source: Thomson Reuters Datastream

Central bank blitz

Nabiullina was eventually able to start lowering interest rates this year, joining Poland, Hungary and others in the ongoing fight to boost economic growth in a world that is still burdened by lofty debts.

Headline interest rates continue to grind lower in Eastern Europe

Headline interest rates continue to grind lower in Eastern Europe

Source: Thomson Reuters Datastream

Eastern Europe does offer some grounds for optimism beyond pro-active monetary policy. In the third quarter of 2015, the Czech Republic, Slovakia, Romania and Poland were the four fastest-growing economies within the EU-28.

Each of the quartet handily outpaced the 1.9% year-on-year growth rate seen across the whole bloc.

Eastern Europe is home to some of the Eurozone’s fastest-growing nations

Eastern Europe is home to some of the Eurozone’s fastest-growing nations

Source: Eurostat

However, all are heavily dependent on trade flows with Germany which represents around a third of Czech exports, for example.

It therefore remains to be seen whether the fall-out from the Volkswagen scandal could ripple through these nations in 2016, in the event the car maker has to cut production and renegotiate deals with its supply chain.

For the moment, the International Monetary Fund (IMF) seems confident enough for 2016, judging by its World Economic Outlook published in October.

The IMF is forecasting 3% GDP growth for 2016 across what its calls Emerging and Developing Europe, compared to 1.8% for the Eurozone overall.

Challenges ahead

For all of Nabiullina’s sterling efforts, Russia is still expected by the IMF to see a second consecutive year of economic contraction in 2016, but at least the foundations of policy seem more secure.

By contrast Turkey may be growing at around 3%, according to the IMF, but inflation north of 7%, a current account deficit near 5% and unemployment in the double-digits leave central bank Governor Erdem Basci with a tough job on his hands.


It may be hard to believe given ongoing oil price weakness but Eastern Europe was marginally outperforming the FTSE All-World index as 2015 drew to a close.

Eastern Europe had underperformed for several years...

Eastern Europe had underperformed for several years...

Source: Thomson Reuters Datastream

...but it looked set to (just) break this losing streak in 2015

...but it looked set to (just) break this losing streak in 2015

Source: Thomson Reuters Datastream

The charts above divide the value of the MSCI Eastern Europe Index by the FTSE All-World (with both priced in sterling rather than dollars). If the line rises, Eastern Europe is outperforming and it is falls the region is underperforming its global peers.

It will be interesting to see if 2016 sees further outperformance after a torrid spell in the wilderness.

Performance was boosted as Russia rallied from 2014’s crushing sell-off, as if to prove the old market adage you can have cheap stocks and good news, just not both at the same time.

The RTS index was also helped by the credibility earned by its central bank. Any rally in oil prices would further help Moscow’s RTS index, given the historic relationship between the two, and therefore the whole region in 2016.

Very crudely, the RTS tends to equate to around 20 times the price-per-barrel of Urals oil (Russia’s equivalent to Western Europe’s Brent Crude and America’s West Texas Intermediate benchmarks).

Russia’ RTS index is seemingly tied to the oil price

Russia’ RTS index is seemingly tied to the oil price

Source: Thomson Reuters Datastream

AJ Bell’s Top Tracker for Eastern Europe

AJ Bell’s free investment guidance service is based on our list of sixteen Top Trackers. One of these covers Eastern Europe, although not in a particularly direct way.

The UBS Emerging Markets tracker has the EPIC code of UB32 and a SEDOL of B76HL88. It comes with a 7% weighting toward Eastern Europe, although Asia, Latin America and Africa/Middle East are all more heavily represented at 69%, 13% and 10% of the assets respectively.

This tracker does not feature in the Cautious portfolio but represents 7% of the Balanced and 15% of the Adventurous portfolios.

These articles are for information purposes only and are not a personal recommendation or advice. All data shown is correct at the time of writing.

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