How To Finance Eastern European Growth (EWO, NBG)
By Matthew McCall

One of the fastest growing parts of the world lies in a region that most investors steer clear of with their hard-earned money. If Eastern Europe just popped in your head, you are correct.

Unfortunately when it comes to high reward investments, they typically carry above average risk. If that was not the case it would quickly turn into a low reward investment after the price was pushed higher by the hordes of buyers.

Due to the high risk associated with investments located in Eastern Europe I have decided to use an alternative strategy for investors. Instead of taking the high risk route, why not lower the risk while keeping the reward fairly high. In the end, the goal is to find investments that have more attractive risk-reward profiles.

Gateway to Eastern Europe ETF
The first investment is the iShares MSCI Austria Index ETF (AMEX: EWO). The ETF is considered our gateway into Eastern and Central Europe in large part because of its exposure to the banking industry. The ETF is composed 100% of stocks based in Austria with one-quarter of its assets in commercial banking.

The next two sectors (mining and energy) combine to make up one third of the ETF. Banking stocks are attractive because the growth in the Eastern European countries has to be funded by someone. Due to the fact many of the emerging countries in the region are unstable, they turn to their friends to the west, (Austria) for the capital to build infrastructure and other areas.

The largest holding of EWO, which makes up nearly 20% of the ETF, is Erste Bank Der Oester. The company provides banking services to over 15 million customers in the following countries: Czech Republic, Slovakia, Romania, Hungary, Croatia, Serbia, and Austria. By investing in EWO and therefore indirectly Erste Bank Der Oeste, investors get instant diversification with exposure to both Central and Eastern Europe.

Banking on Greece
Investors with an appetite for a riskier investment can turn their attention to the land of Olympus, Greece. The National Bank of Greece (NYSE: NBG) is one of the two largest banks in the country and is continuing growth by expanding into emerging European countries.

Net income in the fourth quarter of 2006 increased 36%, beating the analysts’ estimates. The growth does not look to slow according to Citigroup. If NBG meets the estimates the P/E in 2008 would be below 10 based on the current per share price. In the current year, earnings per share growth is estimated at approximately 44%.

Possibly the most attractive country in NBG’s portfolio is Turkey. There have been ongoing talks about Turkey entering the European Union, however it appears the country is not a lock to become the next member. Regardless of the EU decision, the country has been the company’s number one growth region. Finansbank, NBG’s subsidiary in Turkey showed 76% growth in retail loans in the most recent quarter.

The small-business and corporate arena were also at the upper echelon. There are currently over 300 Finansbank branches in Turkey after 100 were added in 2006 and is now one of the top banks in the country. The subsidiary has over 5% market share in the high growth country.

Other than its home country of Greece and Turkey, the bank has branches in southeastern European countries such as Albania, Bulgaria, Romania, and Serbia. At first glance the group of countries is not exciting anyone. However, when getting in on the ground floor of a long-term growth story it typically is not pretty.

Attractive Dividend Yield
Something that cannot be overlooked is the high dividend payout. The current annual dividend yield is 7.0%, making NBG an option for investors searching for high growth potential and a high dividend yield.

At the end of the day if you are the type of investor that wants exposure to high reward regions of the world, but are not ready for the associated risk, the above-mentioned ideas might be your ticket to Eastern European growth.


By Matthew McCall, Contributor - Investopedia Advisor

Matthew McCall is the president of Penn Financial Group, LLC, a registered investment advisor. He also publishes two newsletters, The ETF Bulletin and The PFG Letter, as well as other educational material. As a registered investment advisor, he manages clients' investments based on their specific goals and objectives.

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