ECONOMY

Investors turn to the East

The last three years have belonged to the emerging markets. Russia and Turkey have offered returns of more than 120 percent to those who dared invest there. Now a mild correction is expected, but this does not mean those markets have lost their shine. There is, however, more risk, so professional management is ever more needed. Citibank’s Wealth Management Director Thanos Sofios explained to Kathimerini the secrets of successful investments in emerging markets. His experience from JP Morgan’s mutual funds, which invest in emerging markets and are offered in Greece by Citibank, is precious for anyone interested in such moves. In the year’s first half, mutual fund investment in emerging markets has had double-digit profit percentages. What can this positive course be attributed to? Nearly all emerging markets in Europe enjoyed a strong first half despite their correction at the end of March. The increased liquidity and the capital influxes to Central Europe and Turkey continued as the currencies of Central and Eastern Europe showed gains despite the weakening of the euro in recent months. Turkey started off at a slow pace in the first quarter but ended up as the profits champion in Q2, with MSCI Turkey posting a rise of 4.58 percent in dollar terms after a successful economic stabilization program and a decline in inflation. Russia took advantage of the rise in domestic liquidity and better-than-expected corporate profits. The strong prices of goods led to an upgrade of Russian market prospects, while the trend of importing new stocks to the market continued. The MSCI Russia index recorded gains in the first half of the year within the context of high oil and goods prices. The increased position of mutual funds in Russia has contributed to their high yields in H1. The total three-year yield of mutual funds exceeded 120 percent. Could a correction be natural in the short term after such returns? We are expecting some mild correction in yields across Central and Eastern Europe due to the strong profits since the start of the year and the growth-slowdown indications which will be reflected in corporate profit revisions later in the year. The Russian market seems to be at a crossroads, with increased liquidity, strong gains, mainly from consumer goods exporting sectors, as well as great variation in its returns compared with other emerging markets in the last 18 months. Yet all these positive factors are overshadowed by the high level of share risk bonus and the considerable offer of new stocks. In Turkey, positive news is expected on the privatizations front as is the continuous rise of corporate profits thanks to the strong macroeconomic picture. Some of the oil money from the Persian Gulf countries is also forecast to go to Turkey via participation in the privatization program. All this will also bring further stock gains. Why do mutual funds have the biggest share in the Russian market? Could the market, with high energy sector exposure, have benefited from recent historic rises in oil prices? Oil companies in Russia lead the returns, while sectors such as telecoms and utilities do not fare as well. The market’s biggest worry stems from the drop in growth, which fell to 5.2 percent in Q1 against 6.4 percent in the same period last year. Moscow is seeking ways to use unexpected tax revenues from the price of oil so as to prepare essential investments while controlling inflation. Most listed companies had record profits in 2004. The government eventually secured state control of Gazprom with a further 10.7 percent stake. Fund manager Kerrie McEwan believes that strong cash flows and a disciplined approach to capital spending policies will lead to upward revisions of Russian shares later in the year. JP Morgan suggested that the positive financial data dismisses the existing skepticism, helping Russian shares to catch up with other emerging markets. In Russia, the fund holds a long position, expecting that the strong prices of goods will add value to the profits and valuations of Russian companies. In Central Europe and Turkey, it follows a wait-and-see policy due to liquidity pressures on some blue chip valuations and the risk awareness. What attracted you to Turkey? Will it eventually enter the European family? Despite increased worries after the French and Dutch referendums, Turkish stocks recorded ultra-high returns compared with the rest of the region. The Turkish market ignored the referendums’ results, as interest focused on privatizations, such as that of Turk Telekom and domestic reforms needed to fund the deficit in the current account balance, which is almost 5.5 percent of the gross domestic product. The ruling party’s credibility was tested in passing the bank reform bill that was essential for the country’s renewed deal with the IMF. Banks were the biggest winners after the purchase of Yapi Kredi, the fourth largest, by Unicredito. The fund manager maintains a long position given Turkey’s attractive valuation and its possible EU entry. Should anyone stick to investing in Europe’s emerging markets and are these more affected by Fed or the European Central Bank? The JP Morgan Emerging Europe Equity Fund, available from Citibank, is like a long-term investment, as all investments in such markets are. Europe’s emerging markets are split; for instance the Russian and the Turkish market are closer to the dollar, while Central European markets are more affected by ECB policy. Which markets have hidden opportunities? The long-term history of investments in emerging-market stocks shows that such markets are ineffective due to the poor quality of data and corporate news, that many investors jump to conclusions about short-term trends instead of taking a long-term approach and allowing disciplined buyers to beat the market in returns, as well as by focusing on underestimated stocks for lack of information and false assessments because of fear or optimism by investors.