LONDON, March 11 (Reuters) - Emerging Europe fund manager
East Capital said on Wednesday it sees Russia as the best placed
of the region's markets for recovery after a sell-off stretching
back to mid-2008, adding it favoured defensive stocks in sectors
including retail.
Central and Eastern Europe had been touted as some of the
most promising emerging markets, but have suffered more than
others from the global financial crisis, while slumping oil
prices and war with Georgia hit Russia hard.
The MSCI emerging Europe index <.MIEE00000PUS> fell 57
percent in 2008. Hirn said East Capital had performed worse than
benchmark indices last year, but that this year its performance
had been "steady".
Karine Hirn, founding partner of the fund manager which
manages 1.8 billion euros in public and private equity in 24
countries in eastern Europe and central Asia, said Russia was
able to bounce back from its domestic crisis in 1998, and could
do so again.
"Russia is the country we feel is by far the strongest", she
told a media briefing.
East Capital's Russia fund fell 75 percent in 2008, but it
dropped 85 percent in 1998, Hirn said, and valuations are
similar now to then.
The greater liquidity in Russian stock markets compared with
some other countries in the region also meant Russia was more
likely to attract investors, Hirn said, though the global nature
of the crisis could affect Russia's ability to recover.
Hirn said investors were starting to show an increased
interest in investing in emerging Europe, after scaling back
heavily last year.
"We are trying to be as fully invested as possible. In the
autumn we had a higher cash position -- we have started now to
reverse." The company's Russia fund is only 4 percent invested
in cash, she added.
DEFENSIVE PLAY
Hirn said East Capital was favouring defensive stocks in the
financial crisis, naming Russian budget grocery store chain
Magnit <MGNT.MM>, which reported dollar sales up 10.3 percent
year-on-year and opened 13 new stores in January.
"Valuations have come down a lot and we think budget
companies providing basic food are a defensive play," Hirn said.
The fund manager has also increased exposure to oil, metals
and utilities companies, but has cut allocations to struggling
banking and real estate stocks.
Hirn said countries with high levels of exports as a
percentage of GDP were more exposed to the global economic
slowdown, and presented more risks.
"We have decreased in places like the Czech Republic, where
25 percent of GDP is connected with the auto industry."
Countries unable to shelter under the umbrella of the
European Union were also a concern, Hirn said.
"The EU will not let Hungary down, (but) there may be more
problems for countries like Ukraine or Serbia."
Several emerging European countries have seen their
currencies hit record lows as troubled western European banks
withdraw from the region and eastern European corporates and
consumers struggle to pay back foreign currency loans.
"A lot of this negative news is well-justified," Hirn said,
although she added that the debt burden in eastern Europe was
low. "Countries with low debt levels and large domestic markets
are expected to tackle the economic downturn best."
(Reporting by Carolyn Cohn; editing by Patrick Graham)
