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. Last Updated: 07/27/2016

Russian Funds Lead Cash Race

bloombergWorld oil consumption, driven by the global economic recovery, is rising faster than expected, particularly in energy-starved China.
Stock funds investing in Russia, Turkey and Eastern Europe are attracting the most new money since 2000 as investors bet markets and economic growth in the region will outpace Western Europe for a fourth straight year.

The funds received a net $440 million in the first five weeks of this year, according to Boston-based EmergingPortfolio.com. That compares with $728 million for all of 2003.

The influx of cash illustrates a turnaround in the fortunes of countries such as Russia and Turkey, which are rehabilitating their economies after currency devaluations plunged them into crisis during the past six years. Poland, the largest economy being added to the European Union on May 1, is expanding at its fastest in at least five years after almost grinding to a halt in 2001.

"Investors are looking for a little extra return," said John Coast Sullenger, who manages $344 million in East European stocks at Lombard Odier & Cie. in Geneva.

"The EU is around the corner, there is stability in Russia and Turkey is not looking bad."

The same investors also are dismissing events that in the past might have sparked an outflow of money, fund managers said.

The arrest in October of Mikhail Khodorkovsky, Russia's richest man and Yukos chief executive at the time, prompted investors to sell stocks and push the benchmark RTS Index down 21 percent in the final two weeks of October from an all-time high.

The index since has recovered all but 3 percent of its gain.

Turkey's Stock Exchange National 100 Index was close to 20,000 on Jan. 9, near a four-year high.

That is less than two months after the Nov. 20 bombings of the British Consulate and the British bank HSBC's headquarters in Istanbul that killed 30 people.

The gains have been driven by companies like the Nizhny Tagil Iron & Steel Plant in Russia, whose market value has risen by more than eight times during the past year in dollar terms, and Turkish biscuit maker Anadolu Gida Sanayii AS, which has quadrupled.

Elsewhere, the Czech PX50 Index surpassed 700 last week to a nine-year high. Hungary's BUX Index closed above 10,000 points on Jan. 28, close to its highest in four years and three weeks after Finance Minister Csaba Laszlo was fired for failing to curb a burgeoning budget deficit.

While markets appear to be returning to the heyday of the mid 1990s -- the Russian Trading System in Moscow and BUX in Budapest were the world's best-performing primary indexes in 1996 -- some investors are wary after losing billions in the region.

Russia defaulted on $40 billion in debt and allowed the ruble to devalue in August 1998, sending stocks, bonds and currencies across the former communist bloc tumbling.

Turkey cut back support for its banking sector before abandoning its defense of the lira in February 2001. Street protests ensued as inflation soared.

"We are seeing the same situation now as we saw in 2000, the most expensive stocks are also the riskiest," said G?nter Faschang, a money manager at Vontobel Asset Management in Vienna who has sold his Turkish stocks and reduced Russian stocks. "They should be cheaper, if you consider the risks."

The region is underpinning the latest boom with money from foreign companies, which are boosting investment by building factories and taking over companies to tap a cheap, educated labor pool and as domestic consumption grows.

Hyundai subsidiary KIA Motors Corp. will by the end of the month choose Slovakia or Poland as a location for a $1.5 billion plant to produce 300,000 cars per year.

Poland and Russia were among the top eight most attractive countries for foreign direct investment, according to a survey of chief executives from the top 1000 global companies published in September by A.T. Kearny.

The Baltic states of Estonia, Latvia and Lithuania were among seven East European countries ranked as the top 25 destinations for investment by West European executives.

The three are part of the group of 10 countries joining the European Union on May 1.

"Big chunks of EU money will flow into these countries, helping contribute to much higher growth," said Matthias Siller, who helps manage $500 million in East European equities at Vienna-based Raiffeisen Capital Management.

"Membership will guarantee sustained investment for years to come, and that is very important for these countries."

Poland will expand about 5 percent this year, the steepest increase in five years, while the Czech economy is expected to grow 3.5 percent this year, the fastest pace in seven years, according to the median estimate of nine economists surveyed by Bloomberg News.

The European Commission, the EU's executive arm, predicts growth of 1.8 percent for the euro region this year.

"People want to invest in things moving higher," said Aivaras Abromavicius, who helps co-manage $420 million in East European equities at Stockholm-based East Asset Capital Management.