Potential investors need to be aware that widespread corruption poses a major risk to Russian equities. Transparency International, an anti-corruption watchdog, ranks Russia as the world’s most corrupt major economy, putting Russia 154 out of 178 in its corruption perception index for 2010. This is particularly alarming given the fact that the government has its hand in a lot its economic sectors, including the state-owned oil giant Gazprom.
Poland
- Market Vectors Poland ETF (NYSEArca: PLND)
- iShares MSCI Poland Investable Market Index Fund (NYSEArca: EPOL)
Poland is emerging as a bastion of growth in Europe, boosted by its floating currency, the zloty. As the euro currency has strengthened over the last few years, the zloty has depreciated, keeping Poland’s export industry competitive. On the flip side, as the financial problems struck the Eurozone and the euro currency, Poland’s independence from the euro has helped guard against the problems facing its neighbors.
The two Poland funds are weighted toward the financials energy sectors, which combined make up more than 50% in the two funds. It is this heavy weighting toward the financial and energy sectors that have helped depress the Poland ETFs amid concerns over the future outlook on global growth.
Poland’s finance minister has prepared for a potential second financial crisis if the financial problems in the E.U. were to escalate, stating “We forecast this crisis [on financial markets]and we were prepared for it … We launched one of the fastest and most effective programs of public finance improvement,” during a plenary debate on a government economic report.
Government projections and World Bank estimates put Poland’s GDP growth slightly above 4% for 2011; however, unemployment at just under 12% remains a problem – Poland is viewed as a source of cheap labor for the rest of the continent. Additionally, continued financial duress in the eurozone and signs of slower economic growth has diminished consumer demand, especially in Germany, Poland’s main trading partner.
Turkey
- iShares MSCI Turkey Investable Market Index Fund (NYSEArca: TUR)
Turkey has been posting remarkable GDP expansions, showing an 11% growth year-over-year in the first quarter and an 8.9% economic expansion for 2010. The country’s economic engine has been run by its industrial sectors. The rapid growth, though, has caused some volatility in the country’s inflationary reading.
The Turkey ETF holds almost half of its weighting in the financials sector. Credit growth has been showing signs of weakness in recent weeks, but the outstanding credit levels remains quite robust. Meanwhile, financing on the country’s ballooning current account deficit has mainly come from foreign borrowing as foreign direct investment has been dropping.
Investment Options
Potential investors who would like to select country stocks may choose among the country-specific ETF options available or gain exposure to the whole region through the Emerging Europe ETF theme. Additionally, one should keep in mind that all these funds have heavy weightings toward energy and financial sectors. As such, investors may not want to hold all these funds or risk becoming overexposed to these two sectors.
Read the disclaimer; Tom Lydon is a board member of Rydex|SGI.