April 22, 2010
In a Romanian shopping mall
The general perception when investors talk about countries in the frontier markets grouping is to identify the asset class with countries in the Middle East and North Africa region, as reflected by their dominance in indexes such as MSCI. Eastern European frontier markets like Ukraine and Romania are often overlooked, but we think they offer exciting investment opportunities.
I have been to Romania several times and more frequently over the past six months as we are in the process of establishing and resourcing a dedicated office in Bucharest. I like the country for its historical charm, including places like Bucharest, its capital city, and Sibiu. The Romanian culture is somewhat different from other Eastern European nations since its roots are less Slavic and more Latin.
Romania and other Eastern European countries are transforming their economies from state-dominated socialist/communist economic models to those driven by market forces, private enterprise and increasing privatization.
Romania joined the European Union (EU) in 2007 and is undergoing substantial reforms that we think will strengthen capital markets in the country. But, like other countries in Eastern Europe, Romania was hit hard by the recent financial crisis and needed a rescue package. The EU €20 billion financial package for Romania helped underpin the country’s markets and eased pressure on the Romanian leu currency. The aid package also gave the country some breathing space by allowing the government to run a budget deficit barely below last year’s 5.2% of gross domestic product (GDP). The government also envisages cutting spending by roughly 1% of GDP. In addition, a number of reforms that should put the country on the right track were tied to the package.
Visiting a local supermarket
One of the key designated areas that can be financed with EU funds is infrastructure development, which makes this sector particularly interesting for investors. In our view, great deal of work needs to be done to build infrastructure, so companies involved in construction and construction supplies provide good, potential investment opportunities. In the electric energy sector, the prospects for growth are substantial, given growing demand for electric power.
Sorin, a blog reader from Romania, recently shared with me his observation on the impact of foreign capital flows in and out of his country, especially during the last couple of years. As he said, “From exaggerated optimism, people turned to extreme pessimism.” At Templeton, we evaluate companies with a longer-term, 5-year investment horizon; but more importantly, we learn to be patient and not hit the panic button when there’s a lot of short-term noise. Foreign investors and readers might have misperceptions about Romania and various frontier markets from what they have read. Certain details can get exaggerated, or be construed out of context or out of proportion. It’s important to get beyond surface impressions and understand what’s really happening on the ground.
We see tremendous opportunities for growth and investments in Romania, and are looking forward to expanding our operations there. I definitely plan to return soon.
(c) Franklin Templeton