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Published on October 5, 2007

On Moscow streets, there were either "rubbish cars" or bulletproof Mercedes-Benzes, says Julian Mayo, Charlemagne Capital's investment director. But 11 years have passed and he has witnessed a sea change.

Gone are the Zaporozhets or Ladas with door handles that could cut your hands. Volkswagens have truly become the "people's cars". With an expected growth in gross domestic product of 7.5 per cent this year, Russians have become more affluent and the middle class is spending.

It is perhaps timely for a Thai foreign investment fund to invest in the emerging markets of Eastern Europe or the former Soviet Bloc, which is second only to Asia in terms of economic growth.

The Bt1.7-billion Manulife Strength Emerging Eastern Europe FIF, the first of its kind in Thailand, has at least half of its investment in Russian equities.

The fund, which in turn invests in the Manulife Emerging Eastern Europe Fund, leans heavily towards the financial sector, which includes real estate, and the energy sector with an allocation of 43 per cent and 26 per cent respectively.

Launched in 1997,

the feeder fund has an

annualised return of 18.62

per cent, beating the MSCI Emerging Europe, which

is at 15.86 per cent in a 10-year span.

But to be fair to MSCI, the Manulife fund buys into Turkish and Kazahk equities. Alan Kam, chief executive of Manulife Insurance Asset Management Thailand, refers to these equities as not just "emerging" but "frontier markets".

The portfolio as of August has 9.58 per cent in Sberbank, Russia's largest retail bank, along with 9.37 per cent in Gazprom and 6.96 per cent in Lukoil - representing the energy sector.

To circumvent the 10-per-cent foreign-ownership share limit in the Russian stock market, Charlemagne Capital buys London and New York-listed shares of these Russian firms, hence the fund's currency is US dollars.

But there is always another side to the boom story. The Financial Times' Gillian Tett reported last month about Swedish central bank Sveriges Riksbank's concerns about the Eastern European economies. Many are net debtors, much like the pre-1997 Asian Tigers.

Tett wrote that in places such as Kazakhstan and Russia, corporate debt issuance had been rising and debt quality deteriorating. By borrowing in low-interest currencies such as the euro or Swiss franc, Russian companies might be in for a surprise if these currencies rise unexpectedly.

There are geopolitical risks, too. But Mayo believes that Vladimir Putin will bring economic stability even after he finishes his last term as Russian president.

"He will take a senior position, like Lee Kwan Yew," he said.

Let's hope that Putin will not turn into a Mahathir Mohamad.

Ki Nan Tsui

The Nation