Emerging Europe, Middle East & Africa Equities

Growth worthy of a premium rating

Global Emerging Markets marked up some impressive performance last year, not for the first time. 2009’s rebound was so strong that many investors may now doubt whether those returns can be repeated this year. In short, they probably can’t. But before investors dismiss the GEMs, consider that, while the pace of gain may not be sustainable, neither should it be forgotten that 2009’s gains are just part of a longerterm story that has much further to run.

We believe that the EMEA region offers one of the most exciting and as yet, untapped investment opportunities in today’s market. It is a region rich in natural resources, contains over 80% of the world’s oil proven oil reserves and an abundance of commodities – including platinum, iron ore, nickel and copper. Rapid urbanisation and sustained high levels of GDP growth are leading to a rise in consumerism. We believe this combines to provide a significant opportunity for investors and is perfectly positioned to benefit from long-term global trends.

The region contains almost half of the top 20 fastest growing cities in the world and has a symbiotic relationship with China and India. As China and India continue to industrialise we will see aspirant levels of consumption that the developed world already enjoys. The resulting demand for oil and commodities from China and India is driving a long-term secular trend that EMEA countries are set to profit from. In return, the EMEA region is enjoying significant productivity gains that are a direct result of the global export of cheap manufactured goods from China and India.

The region’s prospects are closely correlated to a recovery in global growth, given the key role of commodities. Commodity prices improved significantly last year as the US dollar weakened, while there was an expectation that state investment in infrastructure would underpin future demand. Selected precious metals stocks, such as Aquarius Platinum, the low-cost platinum producer, and Anglogold Ashanti, rallied following a surge in platinum and gold prices. Mechel, the low-cost Russian steel producer also benefited amid an improved outlook for steel prices and moves to refinance $2.6 billion of debt.
Strong commodity prices aided South African equities but, overall, South Africa lagged the other EMEA markets. The strength of the rand made life difficult for exporters and mining stocks. Nevertheless, if you take into account the market improvement alongside the rand appreciation, I believe that South Africa now looks more attractive than many other markets.

Investors should also bear in mind that South Africa proved more resilient to the pullback in the first instance. Africa was largely insulated from the problems that affected most developed markets because it is primarily as cash economy, where people are not highly indebted. Demand remained robust, especially among low-end consumers. Having fallen less, there was probably less scope for it to bounce back as much as some other markets.

Russia, meanwhile, was the stand-out market in 2009, delivering a return of 121% over the year. Much of that can be attributed to the improving oil price. However, it’s not entirely about oil. For example, Sberbank performed strongly as Russia’s biggest bank reported robust results and strong revenue generation.

It is quite a different story in Eastern Europe. In the early part of 2009, there was a very tangible fear that the financial system of Eastern Europe would collapse. Sovereign debt downgrades and currency weakness contributed to a marked decline in investor confidence. Avoiding the Eastern European banks proved rewarding in the first quarter but, as risk appetite returned to the markets, these stocks rebounded strongly as brokers upgraded their views.

Fundamental investors will still avoid the region given the exposure to debt in foreign currency at both the corporate and consumer levels. There is huge carry trade risk with so much debt denominated in currencies like the Swiss franc.

FF EMEA Fund Performance


Source: FIL Limited, 31/12/2009. Performance figures are calculated net of fees in sterling terms. Benchmark is the MSCI Emerging EMEA Index (Capped 5%). Return since inception is annualised. Since inception date is 11/06/2007. Past performance is not a reliable indicator of future results. Returns may increase or decrease as a result of currency fluctuations.

Is the current strength in commodities a risk or an opportunity?

There are signs of speculative investment and stockpiling. Where we still have exposure, we continue to prefer platinum over gold.

The outlook for platinum looks interesting on a number of levels. Almost half of the world’s platinum is used in the auto industry, where it is a key component in catalytic converters, the exhaust section that cleans certain harmful elements from a vehicle’s emissions. Backing an industry that, less than twelve months ago, was on the brink of collapse may seem counter-intuitive but the demand for catalytic converters will still be the main price driver of platinum going forward. Car sales in emerging markets are growing fast – China is now a bigger market for new car sales than the US – while new EU emission control legislation will be introduced in 2010 and new heavy-duty diesel legislation is creating new markets in shipping and mining trucks.

Our EMEA portfolio manager, Nick Price, believes that we will see a rapid increase in inflation. Policy makers have begun to consider their exit strategies from the current stimulus measures but they do not want to switch off the life support too soon. The risk of leaving it too late is that it allows inflation back into the system – this would benefit precious metals as investors buy into these as a hedge.



We believe that EMEA offers the prospect of growth which is patently not available in the developed world and, over time, the market will pay more of a premium for this. There is, in aggregate, the opportunity to invest today in high–growth stocks at reasonable prices.