To many, an investment strategy that targets former Communist states in Europe automatically has two strikes against it: 1) Communism and 2) the European economy. This unfortunate reality makes the Baltic countries — Estonia, Latvia and Lithuania — the investment equivalent of a diamond-in-the-rough.
The Baltic countries are forward-thinking, educated and ambitious nations with some of the most liberal trade and investment policies in Europe — and a capitalist appetite for financial success. More importantly for potential investors, they are far ahead of their European counterparts in terms of recovering from the recent EU turmoil, mainly because they didn't take a dime of the bailout money offered. Essentially, they said, "We got into trouble, and we don't need anyone's help to get out it." It seems to me that the Baltics' brand of capitalism trumps the capitalist nations' very own. After all, when was the last time you heard that in Washington?
The decision the Baltic nations made to get themselves out of financial trouble using good old-fashioned belt tightening — including an internal devaluation versus a currency devaluation — was both difficult and painful. While overall GDP for Europe contracted -5.7% during the 2009-2010 crisis, Lithuania experienced a -16.1% drop in GDP; Estonia, a -19.5% drop; and Latvia’s GDP contracted nearly 25% (-24.6%), according to Swedbank, a Swedish bank with significant operations in the Baltics.
As post-Soviet states, the Baltics are vulnerable to the vagaries of Russia; witness recent events in the Ukraine and Crimea. One example of this is their dependence on Russian oil. Currently, the Baltics source 100% of their natural gas from Gazprom, the Russian state-owned gas company. As Russia manifests its designs on the Ukraine, Moldova and Georgia, memories of forced internments and state sponsored murder have made the Baltic nations acutely aware of their need to move away from Russia as the sole supplier of their energy. To that end, the Baltic nations are leading Europe in the effort to curb reliance on Russia-sourced energy.
Later this year, a 984-foot vessel, aptly named “The Independence,” will pull into the Lithuanian port of Klaipeda on the Baltic Sea. Owned by a Norwegian liquid natural gas (LNG) operator, the vessel is a floating natural gas terminal which was built in Korea at half the cost of a land-based terminal. When operational in January 2015, The Independence will provide four billion cubic meters of gas annually; about 1 billion more than Lithuania needs in a year. However, seaborne LNG is expensive, which means the Baltic nations will probably remain reliant on Russia for some of their energy needs. But, alternatives such as the one provided by The Independence provide some insurance against a complete embargo.
Additionally, the ongoing crisis in the Ukraine will certainly affect trade in the Baltics. Exports to Russia — Russia is a significant trade partner for all three Baltic nations — will be impacted by both the decreased purchase power of the ruble and EU and U.S. sanctions against Russia. That said, barring escalation of the crisis in the Ukraine, Swedbank anticipates negligible impact on its 2014 GDP growth rate estimates for the three countries, which are 1.8% for Estonia, 3% for Latvia and 3.3% for Lithuania.
Their current GDP growth — which is nearly back to pre-crisis levels — has the Baltic nations well positioned for a faster, strong recovery than that of their Western European compatriots, which continue to lag. According to Swedbank, Lithuania is right now seeing positive GDP growth and by 2014, all three countries will demonstrate positive GDP growth, while the rest of the eurozone will continue to struggle with negative GDP. In fact, the Baltics are exhibiting more robust export growth, import growth, foreign direct investment, investment growth and real-wage growth than their European brethren, according to KPMG.
Among the strengths contributing to this performance are (according to the "Global Competitiveness Report" by the World Economic Forum) a highly educated, IT-literate, multi-lingual workforce. These nations are also benefiting from their pro-business orientation, and their in-depth knowledge of Russia and the Commonwealth of Independent States (CIS; a regional organization of former Soviet Republics, formed during the breakup of the Soviet Union), which makes them uniquely suited to East-West trade. Additionally, Estonia and Lithuania, in particular, are highly integrated with the Scandinavian countries, Finland and Sweden, which, among other advantages, gives them the advantage of an extremely advanced telecommunications infrastructure.
Because of the close ties between the Baltics and the Scandinavian countries, it's not surprising that Swedbank AB (SWDBY) is a key play in investing in the region. The Sweden-based bank is the largest bank in the Baltics serving private and corporate clients.
For a purely local investment, Linas Agro Group AB (LNA1L) is a Lithuania-based holding company in the agricultural sector. It owns farms, produces grains, seeds and feedstuffs, and is involved in the international supply of and trade in secondary products of the food industry. Despite its modest $115 million market cap, it makes nearly five times this amount in annual sales and is growing.
Another Lithuanian company, Apranga APB (APG1L), is also vibrant and growing. Apranga is a retail apparel holding company for 16 subsidiaries throughout all three of the Baltic countries; its market cap is $140 million. Apranga runs franchise stores for privately-owned ZARA, Emporio Armani and Max Mara, as well as outlets for German-based Hugo Boss (BOSSY).
The only mutual fund available in the U.S. based on the benchmark index of the Baltic Exchange is the DMS Baltic Index Fund, which tracks the NASDAQ OMX Baltic Index.
In addition to the investment opportunities listed here, the Baltic nations are exceptionally attractive investment locations. They comprise Europe's fastest-growing market, with 10 million people whose wages are rising and tax burden is low; the Baltics boast some of the lowest personal- and business-tax burdens in Europe. And they are pro-business. Labor costs less than 50% of what it costs in other EU countries and the Baltic nations have flexible labor regulations, special economic zones, and provide a variety of tax and financial incentives. Based on World Bank data, the Baltics rank highly in terms of ease of doing business; ahead of both Japan and Germany.
In my view, the Baltic nations are rapidly making up for lost time under the Soviets and in many ways are more can-do and capitalism-friendly than the so-called “capitalist countries.”
Disclosure: DMS Funds does business with Swedbank, and holds positions in Apranga and Linas Agro.
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