ETF Opportunities in Emerging Europe
The macroeconomic headwinds facing developed European nations are well-known. A sovereign debt crisis of epic proportions has seen to that. Not all of Europe has been affected with sovereign stench of the PIIGS as emerging European nations now sport tidier balance sheets than their developed counterparts.
In the eyes of many investors, only the former Soviet satellite states are considered emerging European nations. However, Mark Mobius, executive chairman of Templeton Emerging Markets Group, points out Turkey can be added into the emerging Europe equation.
The addition of Turkey makes ETF investing in emerging Europe all the more attractive. Not only has the iShares MSCI Turkey Investable Market Index Fund (NYSE: TUR) been a stellar performer this year, but the Turkish economy is services-driven and home to shrinking deficits and a declining debt-to-GDP ratio.
"Generally lower debt than many of their Western neighbors is one of those strengths," Mobius wrote in reference to emerging Europe. "In the key countries of Russia, Turkey, Poland and the Czech Republic, public debt does not exceed 60% of GDP. Private debt is also lower with loans-to-GDP at about 50% on average, compared with more than 100% in many developed markets."
In a new blog post, Mobius notes the degree to which the eurozone's debt crisis has impacted emerging Europe differs on a country-by-country basis.
Emerging Europe did catch a cold by way of the Eurozone's flu, but there have been beacons of light. For example, Polish equities have proven sturdy this year. Poland is expected to show the best GDP growth in the 27-nation European Union this year.
"For example, to improve its fiscal position, the Polish government has established a privatization program which includes reducing the state ownership in some of the largest listed companies (financial and utility sectors mostly) as well as privatizing and listing several state-owned companies," Mobius wrote. "I believe this should lead to higher levels of efficiency and as a result, improve these companies' international competitiveness."
The Market Vectors Poland ETF (NYSE: PLND) allocates 46 percent of its weight to financial services and utilities names while the Shares MSCI Poland Investable Market Index Fund (NYSE: EPOL) devotes 52 percent of its weight to those sectors.
Poland's domestically-focused economy (just 42 percent of GDP comes by way of exports) helped the country skirt the global financial crisis and has helped insulate it somewhat from the sovereign debt crisis. Year-to-date, EPOL has gained 16.6 percent while PLND has added almost 12 percent.
"Poland, Hungary and the Czech Republic have relatively well-developed infrastructure and a well-educated, foreign-language speaking workforce," Mobius said.
Despite some economic advantages, Hungary has had its share of struggles. Earlier this year, the country sported Europe's highest debt-to-GDP ratio and yields on Hungarian sovereigns blew out after Moody's Investors Service downgraded the country to junk status late last year.
There is no Hungary-specific ETF at the moment, but funds that do offer exposure to the country include the EGShares Health Care GEMS ETF (NYSE: HGEM), the EGShares Low Volatility Emerging Markets Dividend ETF (NYSE: HILO) and the SPDR S&P Emerging Europe ETF (NYSE: GUR).
There is also no ETF devoted to the Czech Republic, though Global X filed plans for one last year. GUR, HILO and the SPDR S&P Emerging Markets Dividend ETF (NYSE: EDIV), among others, offer exposure to the country.
For more on Eastern Europe ETFs, click here.
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