New Europe - the best is yet to come

New Europe looks set for a sustainable period of solid growth driven by commodities, consumption and construction according to Oleg Biryulyov, manager of the JPMorgan New Europe Fund.

The fund, which is up 373.9% over 5 years against the MSCI Emerging Market Europe Index which is up 309% over the same period, is well positioned to take advantage of this growth in the region. It is not just Russia that stands to benefit but also the likes of Turkey, Ukraine, Poland and Kazakhstan through the following key drivers:

The 3 ‘C's'

Commodities - Russia is the world's largest producer of oil and gas accounting for about 21% of global gas production. It's also the world's biggest producer of nickel and the 8th biggest producer of gold. Demand for commodities is creating huge new wealth in the region and Russia, in particular, is now one of the world's top 10 economies by GDP. Russia was also the third largest contributor to global GDP in 2007, behind the US and China.

Claire Simmonds, Client Portfolio Manager on the JPM New Europe Fund said "Recent positive sentiment in the Russian Energy sector has been inspired by the announced tax changes which could equal around 10% of net income for the Energy sector. We are somewhat more cautious that all the tax savings will end up in the earnings line from next year; we believe that they will be consumed by a substantial increase in capital expenditure budgets in the sector. The recent rise in oil prices is unprecedented and global demand for oil is still at high levels which is great for the macro picture in Russia but it may not be so good for the Russian oil companies directly"

Construction (Infrastructure) - Historic underinvestment and urbanisation across the region has created the need for new roads, railways, ports as well as power plants. Economic stability and soaring funds from the commodities cycle is providing the scope to invest in several large infrastructure projects creating a multi-billion dollar infrastructure boom in ‘New Europe.' Amongst the large projects due for completion over the next 6 or 7 years are a $12 billion investment for Sochi 2014 Winter Olympics, including new roads and airport expansion and $13 billion has been allocated to underdeveloped Eastern Russia to improve water supplies, sewage systems, roads, ports and tourist facilities by 2012. That is not to mention a $537 billion strategic investment in Russian railways over next 20 years.

In addition, the lack of housing is sparking construction boom with construction demand forecast to jump nearly 20% in 2008 alone.

Consumption - The burgeoning middle class is boosting consumer spending across New Europe with real disposable income growth having risen around 11% per annum since 2000. Furthermore, consumer spending is projected to grow rapidly as disposable incomes increase. With demand for new homes and residential building projects already planned, the home loans market is likely to be a major beneficiary.

New Europe still has a long way to go to catch up with developed countries in terms of consumption - for example, despite massive recent development, Turkish households own six times fewer cars than the EU average. It is also interesting to note that this year, Russia replaced Germany as the country with the 2nd highest number of billionaires with 87 and Moscow replaced New York as the city with most billionaires. Also, Turkey leapfrogged over Japan to land 4th place with 35 billionaires, up from 22 in 2007.

The JPM New Europe Fund has recently been awarded an OBSR ‘A' rating, has a 4 star S&P rating and has returned 195.4% and 373.9% over 3 and 5 years respectively according to Standard & Poor's.

Simmonds concluded: "The underlying investment case for the ‘New Europe' region is compelling at present and we fully expect further sustained growth in the region. Russia, in particular, is benefiting from abundant resources furling the region's development surge and the growth in consumer spending. This is likely to be boosted further in the lead up to the Sochi winter Olympics in 2014 as a further $12 billion investment in infrastructure is planned. This investment is also likely to be matched, if not exceeded, by private investors."

"Without a doubt, the fund benefits from the fact that Oleg is based in Moscow, as a cultural understanding of the region and an ‘ear to the ground' approach are essential tools when picking stocks. A combination of this local knowledge with a global perspective is invaluable."