The emergence of Eastern Europe 0 comments

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In the years after World War 2 the Iron Curtain divided Eastern and Central Europe from the developed Western part of the continent, and although communism in Russia ended in 1991 the countries of Eastern and Central Europe remained relatively backward. However, in recent years they have come into prominence, as a source of cheap (and yet well-educated) labour; one could call them the "factory of Europe" in the same way that China has gained a similar moniker in relation to its role in global production.

The key story is that of "euro-convergence". The EU (European Union) has been in existence since the 1990s but in recent years it has started admitting Eastern European countries, most notably in mid-2004 when a large number of states in Central and Eastern Europe were admitted: Poland, Hungary, Czech Republic, Slovakia, the Baltic states of Estonia, Latvia, Lithuania. The rest of the Balkans (the states of Romania, Bulgaria, Serbia, Croatia, Turkey etc), the traditional powder-keg of Europe, are set to join in the later part of this decade or next.

Singapore has been going big on FTAs (Free-Trade Agreements) these few years, but the EU is mother of all multilateral FTAs. It facilitates and liberalises movement of labour, travel, goods and services across borders of member EU states. It is ironic that pioneer states like France and Germany have suffered the brunt of such liberalisation (high unemployment rates) as their companies are moving production bases eastwards with the admission of Eastern European countries into the EU. These countries boast high educational literacies (hence not just capable of low-cost production; note that automobiles production are increasingly being outsourced there), favourable tax rates (a big plus compared to socialist western European models), and pro-investment policies (everybody realises the way to economic progress is foreign direct investment). Such country environments explain why Western European companies would rather move their capital to Eastern Europe and set up factories there, rather than continue to produce in Western Europe while bringing in cheap Eastern European labour (both options are possible under free movement of labour and capital under EU rules)

At the same time, liberalisation of travel and the ensuing rise of budget airlines (Ryanair, Easyjet) means that Eastern Europe is no longer as remote as before (of course, the death of communism has helped too). Besides facilitating investment and tourism (weekend getaways), development has accelerated around secondary airport sites in the various Eastern European countries.

And who can forget Russia? It is not a member of the EU, but it is one of the key beneficiaries of the resources boom these 2-3 years, in particular oil and gas (among world's top three producers in both), as well as in commodities like metals. All that oil money....

The evidence of the emergence of Eastern Europe is reflected in the MSCI index for Emerging Markets (Eastern Europe); it has probably sextupled from 50 in mid-2001 to ~300 in early-2006 (in comparison, Emerging Markets (Asia) only went up from ~120 to ~350 in that same period). And nowadays we hear about the BRIC theme: Brazil, Russia, India, China --- the four future pillars of world emerging market growth, reflecting the importance of Russia.

Unit trusts specialising in Eastern Europe typically go for energy, materials, utilities, telecommunications --- sectors that play on the investments expenditure and infrastructure construction associated with developing economies. Given the abovementioned benefits of liberalised intra-Europe air tourism and rising domestic incomes due to foreign capital inflows, consumption stocks may also be worth buying. It is possible to find some stocks on the SGX with an Eastern European theme, if one looks hard enough.

References:
(1) Newsweek 13 Mar 06 article: Budget Bonanza
(2) TheStreet.com article Aug 2004: Betting Big on Eastern Europe's Emergence
(3) BBC news article Apr 2004: Eastern Europe's road to the EU