June 20, 2014

Ulle Adamson Ulle Adamson, interim manager of the T. Rowe Price Emerging Europe Fund.

With the election of a new president in Ukraine and the recent de-escalation of the crisis there, the Russian stock market has soared over the past month. Ulle Adamson, interim manager of the T. Rowe Price Emerging Europe Fund, expects tensions to continue subsiding and says attractive investment opportunities are emerging.

Ms. Adamson says the upheaval in Ukraine "remains fluid and is most likely going to drag on for a while. But it remains my base case that, ultimately, some compromise will be reached and de-escalation of the situation will continue."

If the violence in eastern Ukraine heats up, Ms. Adamson says additional sanctions could target some sectors of the Russian economy, such as defense, but sanctions on critical sectors such as energy, metals and mining, and financial services are "unlikely because they are important not just to Russia but also to Europe and the rest of the world."

After falling more than 20% earlier this year, the Russian stock market surged in May as sanctions proved relatively mild and President Vladimir Putin did not jeopardize the presidential elections in Ukraine. "If the situation in Ukraine stabilizes," Ms. Adamson says, "the recovery in the Russian market is likely to continue given that valuations are still very attractive."

She says the fund continues to favor domestically oriented companies in Russia will little exposure to sanctions, such as Internet and consumer staples companies.

Ms. Adamson also makes these key points:

  • The recent market rally in Turkey, amid political corruption charges aimed at Prime Minister Erdogan, reflects some easing of political uncertainty and expectations that he will be reelected in August. Also, Turkey's growth outlook has improved and its currency has strengthened. Ms. Adamson adds, "The long-term growth outlook for Turkey is one of the best in emerging Europe given its very attractive demographics and infrastructure investments over the past 10 years." Consumer companies in Turkey look especially attractive, she says.
  • Greece, which was at the heart of the European sovereign debt crisis, has seen its economy bottom after six years of recession and should show a gradual recovery later this year. "The recovery will be very slow, but there are a few interesting restructuring stories that provide opportunities."
  • Poland has one of the strongest economic growth outlooks in the region, but stock valuations overall are relatively expensive.
  • The key risks in Eastern Europe now are the re-escalation of the Russian/Ukraine crisis, a rise in U.S. interest rates, and political risks in Turkey and, to some extent Greece.
  • Emerging Europe provides investors "a number of attractively valued yet fast-growing companies, and, overall, the valuations are at a discount to most of the other emerging countries. Over time, as the geopolitical situation stabilizes, these valuations will rerate."

Funds that invest overseas generally carry more risks than funds that invest strictly in U.S. assets, including currency risk, geographic risk, and emerging market risk.