Rod Marsden, manager of JO Hambro Capital Management European and Continental European funds tells MoneyWeek where he’d put his money now.
On 1 May 2004, ten new countries joined the European Union. Before this, ordinary European funds could not invest in these countries. There were some very strong performers representing good opportunities, but investors could not tap into them, so it should be seen as good news that they now can.
In the past, we invested in eastern Europe through subsidiaries of some of the largest western European companies. A good example is Brau Union, an Austrian beer and soft drinks producer, which operates in a number of eastern European countries. It was taken over by Heineken, which made us some nice profits. Now that we can invest more directly, we have the potential to gain more leverage into these markets. Following their entry into the European Union, these countries (the Czech Republic, Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia) now fall within our remit.
That said, the performance of markets in the accession countries does not make them very attractive. In the future, though, the trend for moving manufacturing operations from western Europe to eastern Europe will continue to gather pace. As a result, these countries will all get wealthier. This is likely to be particularly good for consumer and banking stocks in these regions. We are trying to invest across Europe as a whole, so these new entrants are not going to suddenly become a huge part of our portfolios, but they do present us with some very good buying opportunities.
The countries we would initially consider putting money into are Poland, Hungary and the Czech Republic. This is because, for now, they are the only accession countries that have a market capitalisation in excess of e20bn. This sounds like a lot, but to put it into context, Nestlé alone has a market capitalisation of around e80bn. In addition to these countries, we would consider the former Soviet states of Estonia, Latvia and Lithuania, which have a foothold in the Russian market, but any stocks we buy there will have to be very liquid.
An important point to bear in mind when considering whether to invest in the EU accession countries is their inherent risk levels. If there is any global shakeout of the equity markets, these countries will be seriously affected due to their illiquidity. Therefore, if you do want a higher level of exposure to these parts of the market than an ordinary European fund can offer, an eastern European fund is probably the best way to go. Our own fund would probably only access stocks in these countries via the more liquid parts of the market, such as banks or telecoms.
When choosing a fund covering the new EU members, it is crucial to look at the manager’s experience. If he has a great deal of experience within developing markets, he is likely to be in a good position to glean which sectors or new placings could offer the best performance without taking too much risk. Experience tells us that there tends to be a similar sort of pattern.
It is important not to get carried away. I do like some smaller companies, but you have to know the risks you are taking, what you are getting into and where it fits as part of the portfolio. I can’t stress enough that it is essential to bear in mind the inherent instability, illiquidity and volatility of the accession countries and their markets. For a fund such as the JOHCM Continental European Fund, the level of risk will always be a prime feature within the portfolio