Central and Eastern Europe could be a successful bet for emerging markets investors this year, thanks to growing domestic consumer wealth and the countries' proximity to an improving developed Europe.
Money management executives said they are beginning to increase exposure to a wider swath of Central and Eastern Europe — Poland, Hungary, the Czech Republic and Romania — following solid performance for the regions' equities markets. The MSCI Emerging Market Eastern Europe index returned 17.21% last year and 37.79% in 2016, compared with -4.69% in 2015.
Sources said the outlook is so strong because of the region's economic reliance on developed European economies, which are expected to continue to strengthen in 2018.
"We increased our allocation to Central and Eastern Europe in September," said Ulle Adamson, vice president and portfolio manager of the emerging Europe equity fund at T. Rowe Price in London. T. Rowe Price upped its exposure to Romania to 4.99%, from 3.13%. It also increased exposure to Hungary to 4.89%, from 4.40%. Earlier in 2017, the fund increased allocation to Poland and Czech Republic to 9.68%, from 4.73% in 2016, and to 2.38%, from 1.28%, respectively.
Ms. Adamson said the fundamentals in the region look solid: Fueled by double-digit real wage growth, consumer spending is driving economic growth.
"The inflation is low and the unemployment is low. These conditions paired with strong prospects of growth in Western Europe could mean more global funds becoming interested in the region," she said.
T. Rowe Price had $181.3 million in its Eastern European fund as of Nov. 30.
Russia, too, is catching the eye of money managers due to improved fundamentals and the central bank's effective management of inflation, sources said. Russian equities returned 4.48% in the fourth quarter of 2017, compared with 0.08% for the whole of 2017, according to MSCI data.