June 2023 / INVESTMENT INSIGHTS
Global drivers create opportunities in Central and Eastern Europe
After years of investing in production in the Far East, complex and high value-added production lines pop up on the European continent
After years of investing in production in the Far East, complex and high value-added production lines pop up on the European continent. The phenomena of near-offshoring fueled by geopolitical uncertainty provides solid outlook for sovereign bonds from Central and Eastern Europe. Further, central banks in Central and Eastern Europe are closer to end the tightening of their monetary policy and could see a faster recovery of economic growth after a potential recession.
Recent global events, such as the war in Ukraine and the pandemic, along with high inflation and spiking interest rates, have led to an emphasis on stable and secure supply chains among nations and enterprises. Near-offshoring investments in geographically closer and allied countries have become increasingly popular, and Central and Eastern European countries stands to benefit for two main factors.
One factor is simply their proximity to large Western European markets.
Another factor is the region’s ability to deliver complex and high-quality products and today's foreign direct investments include higher value-added production lines, such as advanced machinery and car parts, automotive cockpits, and advanced electronic elements.
Two recent examples show the magnitude of foreign direct investments: One is US-based Visteon’s investment in a new tech hub and a full-scale testing center for automotive cockpits in Bulgaria. The other is a joint venture of Croatian Rimac and French owned Bugatti in Croatia. The new Rimac-Bugatti will develop and produce high quality performance battery systems, electric drive units and user interface components for electric vehicles.
Advantage of early discovery
Investing in local currency bonds in Central and Eastern European countries become even more attractive considering that their central banks are closer to an economically desirable inflation rate that can get economic growth back on track. For instance, central banks in Poland, Czech Republic, Hungary, and Romania already raised interest rates in 2021 as a response to high inflation, whereas the Fed, ECB, and key Asian central banks had a wait-and-see approach.
We see appealing investment opportunities in local currency bonds for investors who are not afraid to enter the market early before greater consensus on the investment case is reached.
We have done just that in Romania and Serbia.
In Romania, we invested in 2012 when the country was still rated below Investment Grade, and their bonds were not yet included in any recognized international bond indices.
The situation was similar in Serbia, where we invested well ahead of their entry in recognized international bond indices at yields of 12-13% and held these investments for over five years, up to a yield level of 2.5-3%. We managed to gain over 1000bp in return over five years.
However, it is not enough to simply find bonds that are not yet recognized in international bond indices. A more methodical and long-term investment approach is necessary.
Having a long-term view means that you are not chasing a quick return but instead commit to investing with a long horizon. This approach creates a unique insight into the plans of sovereign borrowers and strong trust between us as an investor and them as borrowers. This was the case in both Romania and Serbia, where we after intensive studies of their political and economic conditions developed a close understanding of policy makers' commitment to developing and strengthening their economies.
Compelling investment case
The Central and Eastern Europe region experiences investments in new factories and facilities, so-called greenfield investments, but we also see investments that redevelop existing facilities and factories, so-called brownfield investments. The investment case seems compelling, however, determining which countries will do best and where to invest must hinge on a long-term investment approach and further analysis.
We are convinced that not only investors but also borrowers will benefit as investors is provided positive returns while supporting the development and investment needs of the sovereign borrowers. A true win-win outcome.
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July 2023 / MARKETS & ECONOMY
Peter Botoucharov is a vice president of T. Rowe Price Group, Inc. and T. Rowe Price International Ltd and is an emerging market credit analyst in the Fixed Income Division. Prior to joining the firm in 2012, he was director of Europe, Middle East and Africa (EMEA) macroeconomic research and strategy at Standard Bank in London. Peter also held positions with Commerzbank Securities in London, the International Monetary Fund in Washington, D.C. and the Bulgarian National Bank in Sofia, Bulgaria. He earned a B.A. in economics from the University of Sofia, Bulgaria, and an M.A. in economics from CORIPE Piemonte, University of Turin, Italy. Peter is a Ph.D. candidate from George Mason University.
