What are the prospects for New Europe?

The ongoing conflict in Ukraine and its repercussions remain the primary theme impacting investment decisions in the region. This consists both of the factors impacting global markets, but also, more nuanced regional only influences.

Negative factors, that have global ramifications, such as further inflationary pressure, heightened geopolitical risk/tension and disruption to global energy markets are well known and documented- we see no need to re-examine them here. Whilst clearly any further escalation in the conflict, by means of involving new countries, remains a core risk for the region, albeit most likely only “tail risk.”

However, the region is also uniquely placed in seeing benefits arising from the conflict, which may not be as obvious, as the globally reaching negatives. These are particularly relevant, for active, bottom-up stock picking strategies, such as our own- we remind readers, our strategy involves investing in “companies” first and foremost, not countries (in a top-down sense). A good example is how Europe is now scrambling to find replacement suppliers, for many of the commodities it previously purchased in large quantities from Russia, not just energy, but also, for example, metals and fertilizers. Eastern European producers are witnessing this positive trend, as their close locality, and often similar grade of product to Russia make them the most obvious option for replacement.

Another example is how the influx of refugees into Poland has benefited certain consumer segments and stocks.

One new emerging theme is the exodus of skilled Russian professionals to Serbia, who are having a meaningful impact on the Belgrade property and consumer market, owning not just to the number of emigrees but also their substantial income, relative to locals. Serbia has managed to navigate a fine line, between not upsetting Russia, whilst still slowly improving its economic ties to the European Union, alongside a recently signed new agreement with the IMF. The country appears an outlier, which could produce strong investment trends, even against a global recession. These opportunities will be not only within the local equity market, but also foreign stocks with meaningful exposure. Our extensive knowledge of companies throughout the region, many of which are orphaned, allow us to exploit such trends.

Lastly, looking ahead, if the conflict should end, international support for reconstruction in Ukraine, will likely be enormous, and regional firms will have huge opportunity there.

In conclusion, perhaps 2023 will allow regional investors to identify compelling bottom-up investment opportunities, arising from the conflict, rather than merely seek to avoid the negatives, as was arguably the case after the initial onset of hostilities.