/Recovering from a lost decade

Recovering from a lost decade

Capital at risk: All financial investments involve an element of risk. Therefore, the value of your investment and any income from it will vary and your initial investment amount cannot be guaranteed.

Emerging Europe is just beginning to leave behind a lost decade of performance. The strong gains of 2016 and 2017 still leave the MSCI EM Europe 10/40 index more than 40% below its pre-crisis peak (Bloomberg, March 2018). Emerging Europe valuations are still below historical trends, investor positioning remains light, and we believe the region has the potential to benefit from several positive developments.

BlackRock Emerging Europe plc aims to achieve long-term capital growth by investing in companies that do business primarily in Eastern Europe, Russia, Central Asia and Turkey. At the end of 2017, Russia accounted for most of its assets, with a 54.1% allocation (BlackRock, December 2017) as we sought to take advantage of the positive monetary and fiscal policies in the country.

An improving economy, record low inflation and the potential for the market to re-rate higher on lower interest rates support our positive stance on Russia, despite concern about the recent escalation in sanctions weighing on market sentiment (Bloomberg, March 2018). Whilst the current situation isolates Russia further, we do not think it will have a meaningful impact on the Russian economy and we maintain the overweight position in the country on the back of domestic improvements and monetary support. Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore the value of these investments may be unpredictable and subject to greater variation.

Inflation continues to fall in Russia and at 2.2% is well below the Central Bank’s 4% target (Trading Economics, March 2018). For a country that saw inflation peak at 16.9% three years ago (as before), this is a remarkable achievement.

“Whilst the current situation isolates Russia further, we do not think it will have a meaningful impact on the
Russian economy” Chris Colunga, Portfolio Manager, BlackRock Emerging Europe plc

The Russian economy appears in good shape; wages are rising and consumer sentiment is positive, which suggests room for interest rates to be cut from very high levels in the past. This would bring down the cost of borrowing for corporates, decrease mortgage rates and potentially increase the demand for real estate. Please note there is no guarantee that any forecasts made will come to pass.
Our view is that much of the negative investor sentiment has already been priced into stock valuations, meaning there are plenty of attractively priced, high dividend-paying companies in Russia.
Please remember that capital growth values may fluctuate and the level of income may vary from time to time and is not guaranteed.

Greek banking sector
The Emerging Europe story has much more to it than Russia alone, however. The financial sector in Greece, for example, offers exciting investment opportunities thanks to a successful third bailout. Our view is that it is still much cheaper than its peers, reflecting its recent difficulties and providing room for substantial improvement as the situation normalises.
The recent successful conclusion of the Third Bailout Review coupled with the successful government bond issuance is providing the government with increased funding at lower rates and reassuring investors.
Whilst there will be volatility through the remainder of the program, we believe it will ultimately end with a successful conclusion and higher valuations. This, coupled with an acceleration of GDP growth, should prove helpful to stock performance. Please note there is no guarantee that any forecast made will come to pass.

“Romania is growing considerably faster than India, and Turkey is growing faster than China”
Chris Colunga, Portfolio Manager, BlackRock Emerging Europe plc

Diverse opportunities
Elsewhere, economies in Eastern Europe are having their best year for a decade. In the Czech, Hungarian and Polish economies
inflationary pressures continue to build on the back of rising wages and low unemployment,giving the potential for the region’s banking sector to break away from the destructive low rate environment as inflationary pressures could allow them to increase lending spreads (BlackRock, March 2018). Furthermore, Romania is growing considerably faster than India, and Turkey is growing faster than China (Bloomberg, March 2018).
Clearly, politics and macroeconomic events continue to shape investment opportunities in Emerging Europe. This is undoubtedly a volatile region but over the last nine years since BlackRock took over the management of the Trust, we have seen political events such as the Ukraine war, broad sanctions on Russia, a failed coup in Turkey, European Union investigations on Poland, yet the share price has more than doubled and returns have significantly out performed the benchmark (as before).
The region represents a diverse opportunity and as such is a useful addition to investors’ portfolios in our view. As Emerging Europe makes up its lost decade, there is a structural opportunity for long-term growth in this forgotten part of the world. To find out more visit here.

The opinions expressed are as of April 2018 and are subject to change at any time due to changes in market or economic conditions. The above descriptions are meant to be illustrative. There is no guarantee that any forecasts made will come to pass.

Risks

Please note you may not get back the amount originally invested. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.
Trust specific risks: Overseas investment will be affected by movements in currency exchange rates. Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore the value of these investments may be unpredictable and subject to greater variation. Investment strategies, such as borrowing, used by the
Trust can result in even larger losses suffered when the value of the underlying investments fall. The Trust’s investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme cases, the Trust’s may not be able to realise the investment at the latest market price or at a price considered fair.

Important Information:

BlackRock have not considered the suitability of this investment against your individual needs and risk tolerance.

To ensure you understand whether our products are suitable, please read the Key Investor Documents (KIDs) and the Annual and Half Yearly Reports available at blackrock.co.uk/its which detail more information about the risk profiles of the investments. We recommend you seek independent professional advice prior to investing.
Non-mainstream pooled investment products status.

The Company currently conducts its affairs so that its securities can be recommended by Independent Financial Advisers to ordinary retail investors in accordance with the Financial Conduct Authority (FCA) rules in relation to non-mainstream investment products and intends to continue to do so for the foreseeable future. The securities are excluded from the FCA’s
restrictions which apply to non-mainstream investment products because they are shares in an investment trust.
Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

The Company is managed by BlackRock Fund Managers Limited (BFM) as the AIFM. BFM has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited. The Company’s shares are traded on the London Stock Exchange and dealing may only be through a member of the Exchange. The Company will not invest more than 15% of its gross assets in other listed investment trusts. SEDOL™ is a trademark of the London Stock Exchange plc and is used under licence.

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