Now is the best time to buy into emerging Europe with sentiment still low despite a strong year for the region in 2016, according to Colin Croft, manager of the Jupiter Emerging European Opportunities fund.
Last year, emerging Europe was one of the best performing regions to be invested, returning 49.94 per cent – better than the top performing developed market S&P 500, which was up by 32.67 per cent.
However, 2016 followed three consecutive years of losses for the MSCI Emerging Markets Europe sector, with its only other positive year over the past half decade coming in 2012.
Performance of index over 5yrs
Source: FE Analytics
As such, Croft says emerging Europe has had a tough five years, with investors shunning the area for less risky areas of the market. The region indeed lost 4.10 per cent over this period.
However, for the long term investor, he says the region remains attractive – indeed over an 18 year timeframe the region is 438.75 per cent higher – more than double the S&P 500.
“It can’t be repeated too often that investing should be a long-term game,” Croft said.
“If investors are putting money aside for 10-20 years, short-term fluctuations in share prices should really be seen as distractions.
Performance of indices since 1999
Source: FE Analytics
“Let’s not forget that 2016 was the first good year for the region after an extended five-year rough patch in which it completely fell off the radar screen for many investors.”
However, fundamentally the region still looks attractive, he says with valuations relatively low to their own history.
“The structural case for investing in emerging Europe remains as strong as ever, in my view, with regional economies still set to grow faster than those in the West due to lower levels of debt and a competitive cost base,” the manager said.
“On most measures of valuation emerging Europe’s markets still look attractive in my view: the Russian market for example has a price/earnings (P/E) ratio of 7 [times], which is in line with its 10-year average.
“That is half that of the FTSE All-Share Index, which currently trades on a P/E of 14.6 [times] and is around 20 per cent more expensive than its 10-year average.
“Consequently I believe that there are still plenty of opportunities to be had in Emerging Europe.”
In an upcoming article, FE Trustnet will take a closer look at the bullish investment case for the Russian market as well as the sectors Croft is targeting within it.
However, Croft, who runs the £109m, three crown-rated Jupiter Emerging European Opportunities fund is not solely focused on Russia.
Indeed, while the fund is 58 per cent invested in the country, despite the MSCI Russia being down 5.42 per cent year-to-date, it has returned 2 per cent so far this year.
Performance of fund vs index over YTD
Source: FE Analytics
“What’s been driving performance so far this year are the non-Russia stocks. Everyone’s been very optimistic about Russia – myself included – but actually its non-Russia that has been performing,” Croft said.
A large part of this outperformance has come from his exposure to Turkey, which he has a 12.6 per cent weighting to.
“The market was very heavily sold off last year so valuations had reached a level where it was pretty much a 10-year low and at some point what goes down must go up and we are starting to see that,” he said.
“Most fund managers think it is pretty much the end of the world in Turkey but people are prone to having big emotional swings on the country.
“Actually the corporates are producing pretty decent numbers, valuations are reasonable and so that’s been making a good contribution.” 
The other area is Poland where 16.2 per cent of the portfolio is invested, and in particular Polish banks, where legacy issues and a potential change of heart from the government has eased investor fears of new regulations.
“In Poland there has been a big driver from the government starting to backpedal on its plans for forced conversion of Swiss franc mortgages which is a legacy issue from pre-crisis in 2005-2006,” the manager said.
“All the banks were giving out Swiss franc mortgages which was a pretty silly thing to do for people whose earnings were in zloty”
While in Hungary the government tackled the problem by forcing all the banks to convert these loans into Hungarian forints – which was painful for shareholders but solved the issue – in Poland this has not been done.
“In Poland they’ve been talking about doing this but there is not the same need because most of the Swiss franc loans are not having problems being repaid,” Croft (pictured) said.
“They are generally affluent borrowers who are capable of meeting their payments and the stronger Swiss franc has largely been offset by negative interest rates but the so they’ve not had a huge spike in their repayments.
“But the government was elected on this program of trying to do something for them and now having looked into it they’ve realised that if they were to force conversion they would cause huge problems and that it’s not really worth the bother. So that has been really positive for Polish banks this year.”
Relatively low valuations and improving fundamentals boosting a number of countries have lifted the portfolio’s performance in 2017, despite a drop-off in Russian equities.
Yet, Croft says it still remains quite early in the investor sentiment cycle, with many investors unwilling to take on additional risk.
He explained: “What I have seen so far is that the fund flows have improved a bit - certainly compared to the same period last year there has been a significant improvement but it is still quite early.
“It takes a long time for people’s sentiment to change towards a region if they’ve had five bad years and one good year but actually that’s the best time to buy really – when people haven’t got too enthusiastic.”