Compelling plays in Europe

Each week, a professional investor tells MoneyWeek where she'd put her money now. This week, Henrietta Seligman, senior EMEA analyst at Somerset Capital Management LLP.

Not all the news from Europe is bad; depressed valuations provide buying opportunities. Poland offers a number of strong companies. Take Warsaw Stock Exchange (PW: GPW). It benefits from an informal monopoly and has developed its status as a regional hub with a share of more than 50% of regional trading volumes and listings from less liquid markets such as Ukraine, Bulgaria, Lithuania and Slovenia.

Although exposed to lower trading volumes, the exchange is diversifying its revenue streams. It recently acquired the only commodity exchange in Poland. A new trading platform will also allow faster trading and bring in new functionality for customers. The stock price may be volatile while eurozone chaos continues, but the valuation is compelling at 13 times 2012 earnings a 27% discount to peer emerging market exchanges.

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Russia's corporate governance issues are a worry, but neighbouring Georgia is unrecognisable from a decade ago when it was emerging from communism. Back then it suffered widespread corruption and extensive power cuts. In 2004 a new government transformed Georgia, which was even dubbed the new Singapore. It is now an exporter of energy to Turkey and a transit hub for the auto trade. Relatively insulated from global troubles, Georgia recorded GDP growth of 7% in 2011 and could even exceed the International Monetary Fund's estimate of 6% in 2012.

Bank of Georgia (LSE: BGEO) offers access to this growing market and a low-debt economy: the loan-to-GDP ratio is just 30%. Management expects loan growth of 20% for the next three years and to maintain credit quality and a return on shareholders' equity of 20%. The bank's dominance (it has a one-third market share and the largest branch network) and its pricing power are reflected in a net interest margin above 8%. A premium listing on the London Stock Exchange and inclusion in the FTSE All-Share and FTSE 250 indices have helped boost liquidity in the shares.

Caveats include the fact that 65% of banking assets and liabilities are US dollar denominated, which exposes the bank to exchange-rate risk. Russian troops occupy two of the Northern provinces, but the situation is calm and an EU border presence is a deterrent to further aggression. Georgia also lifted its veto to allow Russia admission to the World Trade Organisation last year: the tension has eased but the stalemate persists. Nonetheless, the country offers great growth.

A strong South African retail cycle, driven by credit availability, is turning downwards as rising food, fuel and electricity prices squeeze incomes. In response, retailer Foschini Group (SJ: TFG) has invested in supply chain reform, increasing its use of domestic suppliers. This has eased some of the pressures caused by rising input costs from Chinese manufacturers. It also enables the company to react quickly to changing trends.

All of this translates into more affordable prices for customers. Gradual expansion into the rest of Africa offers growth opportunities in relatively untapped markets. Its valuation, above historical levels, is justified by recent operational improvements. A potential initial public offering of financial services firm RCS may also be a catalyst for the shares.