Croatia and Serbia tipped as hidden gems of eastern Europe

(Dubrovnik - Croatie)

The Russian market remains the first port of call for many investors wishing to venture into eastern Europe, but East Capital’s Karine Hirn believes there are smaller markets which show a great deal of potential.

Hirn, co-founder of the Stockholm-based asset manager, considers markets in south-eastern Europe, such as Serbia and Croatia, interesting alternative markets which felt little ill-effect from the global downturn.

‘The recovery rate in Eastern Europe is greater than we had originally anticipated and we do see potential in many of these frontier markets which so far have not drawn a lot of attention from other funds,’ Hirn said.

However, the zone’s dominant country, Russia, remains the firm’s largest market with almost 60% of its €3.4 billion investment portfolio invested in the country.

‘This year will be an interesting testing period for eastern Europe,’ believes Hirn. ‘There is little information available on the companies there, you hear about the trends and performances by going to the countries and speaking to the people involved. That is all part of the risk and there are good opportunities.’

The lack of a domestic investor base in many of the eastern European countries is keeping the markets highly volatile, with foreign investors dominating flows. However, Hirn believes the market situation will improve in the near future.

The Turkish market, which has many analysts divided over its risk and reward potential, is also a country of significant interest for Hirn and is her firm’s second largest market. The drop in interest rates, from 16% to 7% in the last few months, and its increased convergence towards Europea displays promise.

Also, the upcoming announcement that Russia will enter a mutual agreement with Turkey to abolish the need for travel visas between their countries from May this year could prove significant according to Hirn. The new era of cooperation is likely to lead to an increase in business ties and links between both countries.

The firm's fund range includes the East Capital Russia fund, which was one of the best performing funds of the last decade. Indeed, in the last ten years in dollar terms it has returned 1244%, while Russia's RTS index has risen 713%.

(Atholl Simpson - Citywire - 18/03/10)