Eastern European stocks are a bargain

The small size of the region’s markets means that Eastern European stocks are often overlooked in favour of bigger Asian growth stories. Yet there is plenty of promise closer to home as well.

Torun, Poland ©

Poland's ruling Law and Justice party (PiS) comfortably secured re-election at the weekend. PiS, which combines conservative nationalism with leftist economic policies, took 44% of the vote compared to just 27% for the centrist and business-friendly Civic Coalition.

The economy boomed during PiS's first term in power, notes Liam Peach for Capital Economics. GDP growth has averaged 4%-5% in recent years and unemployment has plummeted so much that there is a labour shortage. The government was rewarded for ramping up social programmes, particularly its flagship "500+" child benefit policy. This time it has pledged big increases in the minimum wage.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Cheap stocks

Polish stock are the single biggest component of the MSCI EM Eastern Europe ex-Russia index, which also includes Hungary and the Czech Republic. The index has beaten the wider emerging markets benchmark over the past three years, but it has fallen by 8% since the start of the year.

High growth is expected to slow in coming years as the region's population is ageing and shrinking. Rising authoritarianism in Warsaw and Budapest is another concern, note Leszek Balcerowicz and Aleksander aszek for Politico. Private business investment in Poland has taken a hit over the last three years as the ruling party nationalises businesses and threatens the rule of law.

Advertisement - Article continues below

Yet there are also reasons for optimism. GDP per capita of $15,424 in Poland and $23,078 in the Czech Republic remains far below the eurozone average of $40,012. That leaves significant room for "catch-up" growth as the region converges with wealthier neighbours.

That could prolong Poland's reign as a "European growth champion", says Egl Fredriksson for Euronews. "Polish equity valuations are at the lowest level in seven years" and earnings per share growth forecasts are good. With Polish equities trading on a cyclically-adjusted price-to-earnings ratio of 11 and Czech equities on just 9.9, the downside risks appear limited and there is a greater chance of superior long-term returns. The region's yields are also some of the best in the world, says Frank Holmes for Forbes. The top four emerging markets for dividend yields are Argentina, Russia, the Czech Republic and Turkey.

Yields ranging from 5.8% in the Czech Republic to 7.6% in Romania are attractive for income-seekers. The small size of the region's markets means that they are often overlooked in favour of bigger Asian growth stories. Yet there is plenty of eastern promise closer to home as well.

One way to play eastern Europe is through the Baring Emerging Europe trust (LSE: BEE). An exchange-traded fund tracking Polish stocks is the MSCI Poland UCITS ETF (LSE: IPOL).




How to build a properly diversified investment trust portfolio

Max King explains how to build a well diversified portfolio using one of our favourite tools – investment trusts.
25 Feb 2020

Why investment trusts are the best vehicle for your money

Max King explains the advantages of investment trusts – sometimes called closed-ended funds – over their open-ended counterparts (or Oeics).
11 Feb 2020

Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
17 Jan 2020

Most Popular


Will coronavirus kill off the bull market?

It seems clear now the coronavirus will at some point go global. And when it does, will it bring down the stockmarket’s bull market? John Stepek looks…
27 Feb 2020

Gold, coronavirus, and the high cost of face masks in northern Italy

The price of gold is spiking – as it always does in a global panic. But this bull market predates the coronavirus epidemic, says Dominic Frisby, and w…
26 Feb 2020

What to look out for as panic over coronavirus spreads

Markets have started to get properly worried about the coronavirus outbreak. And it’s not just stocks, says John Stepek. Here’s what you should be kee…
28 Feb 2020

Is 2020 the year for European small-cap stocks?

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, on why he believes European small-cap stocks are performing well.
12 Feb 2019