Eastern Europe remains as impressive and overlooked as ever.
Despite seven straight years of incredible gains, Eastern Europe can certainly be referred to as the forgotten emerging market. Yes, the region includes Russia, also known as the "R" in the fabled "BRIC" emerging markets foursome (Brazil, Russia, India and China). Nevertheless, there is more to Eastern Europe's growth than mother Russia's petrodollars.
Labor remains cheap inside the old Iron Curtain, even competitively so with China. Meanwhile, the entrance of many Eastern European countries into the European Union has increased the region's political and legal stability, enabling it to attract new capital.
"Salaries are still low relative to the rest of Europe but they are rising. Eastern Europeans are putting that money to use," says Thomas Neuhold, co-portfolio manager for the
Eastern European Equity fund, in a
recent Street.com TV interview. "That will be the story over the next decade."
Neuhold's fund is up 8.3% year to date, which may be fine for most investors -- especially with two months to go in the calendar year -- but it is well off the pace of its knockout three- and five-year average annual returns of 23% and 33%, respectively.
"It could not keep growing like that forever," says Neuhold, who has been raising cash lately in response to the global credit worries. "On the other hand, there is still a lot more growth left."
Neuhold says the region's rising incomes benefit financial stocks first and foremost, because people will need to open bank accounts and get mortgages and loans. The rising tide of wealth also helps real estate companies like
, which, like many of Neuhold's stocks, is listed in Austria, but has the bulk of its properties in Eastern Europe.
Due to its proximity, Austria has traditionally served as the safe gateway market to Eastern Europe. However, Neuhold's second-largest holding,
is based in the British Virgin Islands and trades on London's Alternative Investment Market (AIM), a sub-market of the London Stock Exchange. Equest owns big stakes in insurance companies in Bulgaria, and is also active in real estate there. Neuhold maintains that the company is cheaply valued at 10 times earnings and trades at a discount primarily because of its listing on the lightly regulated AIM.
And while many Eastern European funds are betting all their rubles on Russian oil stocks, Neuhold says valuations are stretched and has limited his energy exposure.
"They may look cheap, but they are underinvested, so capex will be rising and profits decreasing over the next few years," he says.
The biggest risk to Eastern European growth, says Neuhold, is that the burgeoning economies overheat.
"There are signs of inflation in the Baltics and Romania. But on the whole, things continue to look up as Eastern and Western European economies converge," he says.
Now if only the world would start looking.
Before joining TheStreet.com, Gregg Greenberg was a writer and segment producer for CNBC's Closing Bell. He previously worked at FleetBoston and Lehman Brothers in their Private Client Services divisions, covering high net-worth individuals and midsize hedge funds. Greenberg attended New York University's School of Business and Economic Reporting. He also has an M.B.A. from Cornell University's Johnson School of Business, and a B.A. in history from Amherst College.