Emma Wall: Hello, and welcome to the Morningstar Series 'Why Should I Invest With You'. I am Emma Wall, and here with me today is Sam Vecht, manager of the BlackRock Emerging Europe Trust (BEEP).
Hello, Sam.
Sam Vecht: Hi.
Wall: So emerging Europe, people will classically think of Eastern Europe. Is that the case? I mean, how big is the region?
Vecht: It's quite big. So within our emerging Europe investment trust, we include Russia, Turkey, countries of Central Eastern Europe, Poland, Hungary, Czech Republic, and then we go far away as Kazakhstan, Kyrgyzstan, Georgia, all countries that – and Ukraine, of course, very much in the news at the moment; countries that we've had investments in or currently have investments in.
Wall: How diversified are their stock markets? Because some emerging stock markets can be quite concentrated in just one or two sectors. What's the region like?
Vecht: So it's definitely true that when one looks in the market cap basis, that would be the case in a country like Russia, where in the market cap basis, energy and financials materials are dominant, but if one just looks at the number of liquid stocks rather than just looking at market capitalisation, there is a very big diversity of sectors that one can invest in. All 10 MSCI sectors are quite well-represented in relatively liquid stocks across emerging Europe.
Wall: How much of a challenge is doing business in those countries? Because not to make a gross generalisation, but there are questions about corporate governance in some of those regions. Does that concern you?
Vecht: I think in all emerging markets, there are questions about corporate governance and that's one of the aspects of doing business or investing in emerging markets. It doesn't exit to the same extent in the developed world. They are by definition emerging. So, they don't have the same standards that we would expect in the U.K. or the U.S. That said, for us, the much big issue is investment governance, a lot of focus is on the corporate governance and the idea of there are being malfeasants or wrong actions taken by company managements that are illegal, they're less of an issue, while we are not saying it's not a problem, than just bad investment decisions that when companies generate cash flow what do they do with it. Do they use it to build a new mine, a new factory? Or do they build a new corporate headquarters or do they buy corporate jet? All of those are permissible. The question is which is the most advisable.
Wall: What then is unique about the region that can offer investors opportunities?
Vecht: One of the most attractive features of emerging Europe today is that it is the region in the world that has seem to have been forgotten by many investors. It trades at a record discount, both to emerging market and to the developed world. So, as many markets have seen a recovery post 2008-2009 lows, that's not been the case in emerging Europe, and that's true whether one looks at Russia or Hungary or Ukraine, it's not just a one country specific.
So, the markets at record low valuation levels on a relative basis and un-relative basis and even on an absolute basis, it's very cheap. Dividend yields are high across the sector and earnings have grown. I think it's worth remembering that emerging Europe had better earnings growth than either the developed world or the emerging world for the last 10 years. It's had a higher ROE (return on equity) than the either the developed world or the emerging world for the last 10 years, so not everything is as bad as many people perceive it.
Wall: I think that would surprise a lot of investors, especially as there you that magical word dividends. Perhaps you could give us a couple of examples of companies that exercise that a good investment governance as you said, but are still under the radar?
Vecht: I think if one looks across Russia today and obviously as a country attracting lots of coverage, for lack of a better work at the moment. Many companies within Russia have been increasing their pay-out ratios over the last few years. So historically, Russia was right at the bottom end of how much it paid down with a country like Korea in the emerging market basis, but that's been increasing. So, we've seen many companies now paying out 25%, 30% of earnings and with the share prices being so low, that means across Russia there are many companies now yielding 5%, 6%, 7% without going down the market cap spectrum.
Wall: That's very attractive.
Vecht: It is. I think it's very attractive and I think it's a point often ignored amongst all the headlines one often reads about that part of the world.
Wall: Sam, thank you very much.
Vecht: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
