Eastern and Central Europe offer an attractive combination for investors. The region is growing at rates similar to most other emerging markets around the world. At the same time, due to the adoption of EU law and fiscal discipline, these nations offer currency and political stability of the sort typically found only in developed nations.

The Central Europe & Russia Fund (NYSE: CEE) is a closed-end fund that invests in this region, along with Russia and Turkey. The fund seeks to have roughly 90% of its assets divided equally between Central/Eastern Europe and Russia, with the remaining 10% invested in Turkey. As of the end of June, the fund had 67 holdings and 98% of assets were in common stocks.

The fund's single-largest country bet is on Russia. Prominent Russian natural resource firms Lukoil, Gazprom, and Norilsk Nickel account for around one-quarter of the fund's total assets.

The rationale for investing in Russia is somewhat different than for Eastern Europe. Russia is extraordinarily rich in natural resources including oil, natural gas, and metals like nickel. It's also a key supplier of these resources to the European market. For example, Russian gas accounts for more than 50% of Germany's supply and more than 90% of supply in Hungary. Therefore, Russia benefits from growth across the EU in terms of greater sales of such vital commodities. Of course, Russia is also a key supplier for such commodities into the fast-growing Asian markets.

Also, just as is the case in Eastern Europe, economic growth in Russia means growth in domestic consumption. The Russian market is becoming an increasingly important destination for European exports.

Outside of energy and natural resources, one of CEE's largest bets is on financial services. Banks and financial services firms account for more than one-quarter of CEE's assets. For example, in Poland the fund has significant investments in Banka Polska and Bank Pekao, two of the nation's largest banks. As economies mature and develop, financials tend to show considerable growth. On the commercial front, young businesses in the emerging markets need access to capital, and banks offer that funding. And on the consumer front, individuals need access to basic savings and deposit services for their cash.

More importantly, mortgages were unheard of across most of Eastern Europe a decade ago. Nowadays, some nations are seeing mortgage-lending growth topping +20% annualized. That spells sharply rising interest income for banks.

Another big bet for CEE: telecommunications services. The major telecommunications firms are among the largest publicly traded companies in Eastern Europe. Once monopoly providers owned by the government, most have now been privatized, but still maintain overwhelming market share in their home nations.

The region's primary telecom providers are not only growing, but they're growing profitably. Margins for the best telecoms in the region are double or more the levels of those in developed parts of Europe. In addition, many telecom providers in the east are showing growth by selling services such as high-speed Internet to their existing subscribers.

Finally, it's worth mentioning Turkey. Turkey is not yet part of the EU, though the country is in the early stages of a bid to enter the European Union. The nation is taking steps to get its financial house in order and ease fears of political instability. Such reforms have helped the economy considerably; the Turkish stock market has soared +725% over the past five years in U.S. dollar terms.

The Central Europe & Russia Fund is well-diversified and has exposure to the countries and industries that will benefit most from growth in emerging Europe and Russia. And the fund also has a proven track record of success, up more than +35% annualized over the past five years.

Paul Tracy
Editor
StreetAuthority Market Advisor

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Paul Tracy co-founded StreetAuthority.com and became the firm's Chief Investment Strategist in 2001. He also co-founded TopStockAnalysts.com in 2006. Prior to that he spent several years as Managing Editor at a multi-million dollar financial publishing firm with over 150,000 subscribers. In addition to his role as managing editor and lead financial writer, he was also responsible for equity research and managing a team of seasoned professional financial writers, researchers and market commentators.

Paul's previous experience includes a position at Robert W. Baird & Co.'s full-service brokerage operations as well as economic research work on a Money and Banking project funded by the National Bureau of Economic Research. He has also spent time doing outside consulting and research for the University of Virginia, has appeared as a guest expert on several prominent financial radio shows, and has been a featured speaker at various investment conferences across the U.S.

Paul graduated with a B.S. in Finance and Management from the McIntire School of Commerce at the University of Virginia.

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