A visit to Emerging & Frontier Europe: the “Originals” are back

Prague, Czech Republic


Growing up in Toronto, I fortunately (or unfortunately, depending on one’s view) became a Maple Leafs fan. But I was also a fan of hockey in general, so I always enjoyed watching any “Original Six” hockey team – Toronto, Montreal, Chicago, Boston, New York and Detroit. That may seem odd, especially given the long Toronto-Montreal rivalry, but I appreciated the history of hockey, so it was a different thing to watch the Chicago Blackhawks than, say, the Anaheim Ducks (no disrespect intended).

In frontier and emerging markets, I have a similar viewpoint for the “Original EMs” – that is, the former Warsaw Pact countries that captured most investors’ imagination in the late 1980s and early 1990s. When the Berlin Wall fell in 1989, it was reasonably easy for investors to consider countries such as Poland, Hungary and the former Czechoslovakia “emerging” as the USSR’s grip on Central and Eastern Europe (CEE) ended with the collapse of the Soviet Union in 1991. This was true for me personally, because my dad was from Hungary; he fled to Canada during the Hungarian Revolution in 1956. He took me back to Hungary in 1983 to visit my grandmother, and even a young Canadian kid could grasp the country’s stagnation and how opening up to the West could cause dramatic economic change.

These markets provided great investment opportunities for many years, reaching a peak in 2007, when many countries became over-exuberant in their outlooks. Banks started to issue cheap loans and mortgages in Swiss francs and Japanese yen (rates were cheaper than in local-currencies). This over-leverage collapsed during the global financial crisis of 2008, when many homeowners found themselves earning lower wages in local currencies but facing substantially higher monthly mortgage payments. The next ten years saw steady economic headwinds in the form of bank taxes, bad-loan write-offs and shrinking populations as Poles, Hungarians, Estonians and Romanians emigrated to Western Europe, and especially the U.K., in search of better opportunities.

In the fourth quarter of 2019, however, I attended an annual regional investment conference in Prague, Czech Republic, which covered companies from emerging and frontier Europe, I noted that almost every meeting indicated that growth was surprising on the upside. The region has come out of its ten-year slump; GDP growth is near the highest levels in emerging markets generally, at 4–5% (see Chart 1); and consumers are benefiting, with wages growing at 7–9%. All this while, as seen in Chart 2, valuations for many countries remain near historical lows.

Another key change that is less discussed is that population growth is positive again (see Chart 3). This growth is driven by the rise of returnees (partially driven by situations like Brexit in the U.K.) and a baby boom in countries such as Hungary. From a regional perspective, Central European countries (primarily Hungary, Romania and Czech Republic) have led this revival for the past three years, but it is now spreading to adjacent markets such as the Baltics, Bulgaria and Greece, and even as far east as Kazakhstan. Investors are likely aware of the growth (although the brokerage coverage of this region has fallen since 2008), but we can reasonably expect to see multiples re-rate upwards, due to better relative EPS growth and the new “secular” tailwinds of population growth, especially relative to Western Europe, Japan and China.


Thanks for reading.


Adam J. Kutas, CFA

Chart 1: GDP growth – CEE vs. emerging markets and Scandinavia*
chart 1 for Kutas  blog Originals are back
Source: Haver, FMR, last 4 Quarters: from sep2018-sep2019
* CEE countries include Bulgaria, Croatia, Estonia, Kazakhstan, Romania, Czech Republic, Greece, Hungary and Poland.


Chart 2 – Price-to-book for CEE countries
chart 2 for Kutas  blog Originals are back
Source: FMR.


Chart 3: CEE net migration
Chart 3: CEE net migration
Source: Haver, FMR


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