Estonia: Contrarian Country


With well documented issues in Greece, and Spanish yields making new highs on a daily basis, Europe has been a region that most investors have soured on. With rumours of Grexit and the potential dissolution of the European Union looming, countries in the region and their investors have been running for the exits. Yet one country has been going in the other direction: Estonia.

The Estonian equities market has been one of the best performing markets in the world this year with the OMX Tallinn Index (OMXT) up over 20% YTD. This is particularly amazing given the performance of other European exchanges, and the gloominess permeating the European markets.

OMX Tallinn YTD%

Not only has its market performance bucked trends, but Estonia’s recent monetary policy decisions would surprise many. As Greece contemplates re-adopting the drachma, Estonia actually gave up the kroon and embraced the Euro by adopting it as its official currency in 2011. This was a feat they managed only after a show of fiscal discipline that required austerity measures on a level surpassing those currently causing riots in Greece. What’s more is that Estonia has flourished since then, with real GDP growth of 7.1% in 2011, a rate far outpacing the region’s average of 1.2%. While this growth is expected to slow in 2012, it was not artificially powered by much leverage or government stimulus. Their public debt to GDP is easily the lowest in the region at a paltry 6%. 

With a GDP per capita of almost $20,000, a country like Estonia is usually considered too developed to be a frontier market. They managed to double GDP per capita in the past decade, and it is the high growth rates, small size of the market, and state of the economy all compare favourably to other markets we have looked at. There is also a big difference in prosperity between the conditions in Tallinn, the capital, and the rest of the country. While a third of the country’s population resides in Tallinn, the city produces over half of Estonia’s GDP. This means that while Tallinn is on par or even above the average city in Europe, the majority of the country is still lagging behind.

Another reason we are considering Estonia a frontier market is that it is far off the common investor’s radar. The lack of awareness can be seen in the ways Estonia has been labelled. Although it is often referred to as being part of Eastern Europe, it is culturally closer to Scandinavia and shares more ties with its neighbour to the north, Finland. Ties to Russia are also sizable due to its history as a territory of the USSR and with a quarter of the population ethnically Russian. This also means that its inclusion as a “Baltic Tiger”is a misnomer despite its proximity and similar growth rates to the other members of the group, Latvia and Lithuania.

The good news is that as a member of the EU, Estonia represents a way to gain exposure to Europe at a time when most assets have been hit hard. The bad news is that it as a member of the EU, and will be called upon to shoulder some of the pain that measures to save or break up the EU will entail. 

Investment Pros:

  • Amazing fiscal position and trade surplus
  • Entrepreneur and investor friendly: low, flat taxes and ranked 24th in the world in Ease of Doing Business in 2012
  • Ideally located as a hub between Europe, Scandinavia, and Russia
  • Almost energy independent (90%) due to oil shale
  • Nice balance of knowledge-based and commodity-based industries
  • Great communications infrastructure (99.8% internet penetration rate)
  • Weak Euro is excellent for exporters
  • Advanced electronic equity exchange run by NASDAQ

Investment Cons:

  • GDP growth slowing compared to 2011
  • EU breakup/bailout fears, especially if on the hook to take on debt
  • Relatively high unemployment of 10.9% in Q2 2012
  • Equities already up over 20% YTD, missed the first leg of the rally
Investment Verdict: Buy

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