Written by the Hermes Management investment team.
Central and Eastern Europe is not one market. A Slovenian life-science exporter, a Polish developer and a Ukrainian gas producer share a time zone and almost nothing else: different currencies, different courts, different definitions of what a signed contract obliges you to do.
Generic emerging-market allocation treats that variance as noise and buys the index. We treat it as the entire opportunity. The premium in these markets is paid for diligence work that does not scale – site visits, local counsel, supplier calls, understanding who actually controls a company as opposed to who is listed as owning it.
Three questions decide most of our decisions. Does the cash flow exist without a policy subsidy? Can the asset be inspected, counted or metered? And if the majority owner disappeared tomorrow, would the business still open on Monday?
Risk here is rarely priced wrongly by a little. It is priced wrongly by a lot, in both directions – and the firms that get paid are the ones prepared to do the unscalable work of finding out which.