European investors this year have focused their attention on European elections, the Brexit negotiations and the political turmoil in the UK, while Eastern Europe has stayed out of the limelight.
Yet over the past 12 months ETFs offering exposure to Eastern Europe have delivered strong double-digit returns, rising by 26% on average, according to TrackInsight’s data. The prominent MSCI Eastern Europe index is up 19.3% over the year to 30 June.
Most local stock markets have enjoyed a strong run so far this year, with the Budapest Stock Exchange up around 20%, while the Czech, Slovenia and Serbian stock markets have delivered some 15% over the period.
The double-digit returns are a reflection of the strong growth in these countries in the first half of the year; Romania, Poland, Hungary, Slovenia and the Czech Republic have all delivered over 1% GDP growth in the first quarter. They have also seen falling unemployment, and rising industrial production and retail sales figures, which are all drivers of economic growth.
Yet flows into ETFs exposed to Eastern Europe have been subdued despite the strong returns. Over the past 12 months, cumulative flows into these products were just €24.4m, leading to total assets under management of €399m in the segment.
One of the reasons for muted flows could be the high exposure of Eastern European indices to Russia – it makes up nearly 64% of the MSCI Eastern Europe index, for example.
Being the largest country in the region, this high weighting is justified, yet investors are understandably nervous about Russia, not least as a result of sanctions imposed on a number of major Russian companies by the US and Europe.
Russia’s RTS index had a very strong 2016, rising 52% in dollar terms, while its Micex index rose 27% in rouble terms, boosted by the election of Donald Trump as US President in November, as many expected relations between Russia and the US to improve as a result.
However, this year the picture has been quite different. The Micex index is down nearly 16% since the beginning of the year at 1,929, while the RTS index is down around 10% to 1,031.
This has been driven partly by the deteriorating relationship between Russia and the US, with the US Senate recently passing a bill to impose further sanctions on Russian banks and energy companies as a punishment for the country’s alleged meddling in the US presidential election.
Investors have also continued to worry about oil prices, with the Organisation of the Petroleum Exporting Countries (OPEC) struggling to keep a lid on oil production, which has seen prices fluctuate this year.
Gaining exposure to Eastern Europe
With these concerns in mind, it is no wonder investors have chosen to stay away from Eastern Europe, tarring the whole region with the same brush.
However, there are ways to gain exposure to Eastern Europe through ETFs without automatically holding a high allocation to Russia.
An example of a fund that does so is the €215m Lyxor UCITS ETF Eastern Europe (CECE NTR EUR) – C – EUR, the only rated products in the list of Eastern European stock ETFs analysed by TrackInsight, with a four-star rating.
The fund offers exposure to the CECE index, a capitalization-weighted index consisting of Czech, Hungarian and Polish blue-chip stocks which are members of the respective country indices: CTX Czech Traded index, HTX Hungarian Traded index and PTX Polish Traded index.
Despite rising by a whopping 37% over the past 12 months, the fund has seen meagre cumulative flows of €8.8m over the period. It has a total expense ratio of 0.50%, a tracking difference of -0.4412% and a tracking error of +9.30bps.