East Capital Explorer’s investment universe encompasses Russia and the other CIS countries, the Balkans, the Baltic States, Central Asia and Central Eastern Europe. For several years economic growth in our investment universe has been characterised by substantial growth. We believe that the general future prospects for the region will remain good.
Our assessment is based on a number of factors that to a varying extent apply to the majority of the countries in the region. Some of these factors are:
The main driver behind the growth is domestic consumption. Rapidly rising salaries, combined with larger disposable incomes and better borrowing possibilities, improve purchasing power and create higher standards of living. Private consumption is currently growing faster than GDP in most Eastern European countries. This benefits the retail- and consumer goods sector.
Despite the healthy growth in recent years, the financial sector remains fairly undeveloped compared to Western Europe. The ratio of banking assets to GDP is low. Credit card and cash machine penetration is also still relatively low while the lending market, both private and corporate, is in its infancy. Envisaging continuing growth, this sector probably stands the most to gain from domestic growth.
While private consumption is on the rise and the mortgage market is developing well, a great deal of the region’s housing still holds a low standard. Living space is limited and the need for renovation is great. Urbanisation is increasing by the day, as is the housing shortage and the need for commercial property. This benefits the construction- and real estate sector.
Ten Eastern European countries have already joined the EU. Several others are waiting for or aiming for membership. This convergence with the EU has led to the implementation of a number of reforms and laws that have improved the business climate in the region and increased the level of foreign direct investment. The EU also constitutes an important trade partner for the region.
Several countries in the region have implemented major changes to their tax legislation. One initiative is what is known as flat tax, i.e. a uniform taxation level, unrelated to income size. Simplified taxation laws have encouraged both domestic and foreign investments.