Eastern Europe: A shelter from the QE taper tantrum

published 6 September 2013

Looking for a haven from the taper tantrum'? You could do worse than look east to eastern Europe. Most emerging markets have seen a strong sell-off following hints from US Federal Reserve chief Ben Bernanke that the Fed plans to slow the flow of quantitative easing (QE) in the near future, but some eastern European markets have remained remarkably resilient.

Stock markets in central and eastern Europe are up 1.2% in the last three months, according to MSCI data, compared with a 7.5% fall in emerging markets as a whole, notes The Wall Street Journal. What's more, if you exclude Russian firms, which have been hit by falling commodity prices, the markets are actually up by 2.3% overall. And, while currencies such as India's rupee and Turkey's lira have slumped to record lows against the dollar, Poland's zloty and the Bulgarian lev have risen against the US currency since May.

A relative safe haven

According to data provider EPFR Global, while investors have withdrawn $930m from equities in Europe, the Middle East and Africa since May, $230m has flowed into funds buying Polish equities. What's more, Paul Hollingsworth and John Higgins at Capital Economics reckon emerging European equities may continue to outperform stocks in other emerging markets, even when prices start to recover.

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For a start, share price valuations have fallen to "attractive levels". Despite the recent rally, the price/earnings (p/e) ratio of Poland's stock market still "remains well below its ten-year average". It's also below the p/e ratios of other emerging-market regions. Growing domestic demand is also providing a boost to these economies, as the lot of consumers gradually improves.

Perhaps more importantly, the recent return to growth in the eurozone for the first time in a year and a half also bodes well for emerging European companies, particularly those in countries such as Hungary and Poland, which rely on the eurozone for the majority of their trade. Hungary, which enjoyed 0.5% economic growth in the second quarter, had a trade surplus of €3.68bn in the first half of the year, compared with a €3.62bn surplus last year. Poland, which saw growth of 0.8% in the second quarter, had a surplus of €574m in June, compared with a deficit of €1.09bn last year.