9. HEDGE FUND SEES UKRAINE STOCKS ON THE RADAR

Ukrainian stocks will become a bigger part of emerging market portfolios
By Pratima Desai, Reuters, London, UK, Dec 22, 2005

LONDON – Ukrainian stocks will become a bigger part of emerging market portfolios over the coming year as strong domestic demand boosts economic and corporate earnings growth in the country, a hedge fund manager said.

Ukraine’s government has pledged to reform the economy, the country is a potential candidate for the European Union and is expected to join the World Trade Organisation next year, which should underpin economic growth, analysts say.

The EU also recently awarded Ukraine market-economy status, which should also help trade relations with the 25-member bloc.

“Ukraine is increasingly coming onto the radar screen. There is tremendous pent up domestic demand,” Leila Kardouche, manager of the RAB Emerging Europe Fund, told Reuters this week.

“Investment is picking up … Growth will continue to be strong … Many entrepreneurs will be listing their companies, creating opportunities.”

Ukraine threw off its communist shackles in the early 1990s along with other east and central European countries like Hungary and Poland and Baltic states such as Estonia. But it was ignored by most investors until the “Orange Revolution” protests in 2004 boosted the chances of reform to liberalise the economy and financial markets.

“In Ukraine we are looking at banking, industrials, mining and consumer plays,” Kardouche said. Kardouche runs the RAB Emerging Europe Fund, which has more than $100 million (58 million pounds) under management and has returned more than 25 percent since it was launched in December 2004. The fund is one of 16 run by RAB Capital and its subsidiary Cross Asset Management.

Kardouche also rates South Africa and Russia, even though stocks in these countries have had a strong run recently. “South Africa and Russia have been key bets for us this year,” she said. “We anticipate further good performance from these markets in the coming year although returns will not be as easy going into 2006.”

Russia, Kardouche says, has been saved by record high oil prices over the last few years since it defaulted on domestic debt in 1998. If oil prices came down to $20 to $30 per barrel there would be meaningful repercussions on growth,” she said. “Which is why economic management is important going forward. In other words, budgetary discipline and structural reform.”

In Russia’s banking sector the authorities are trying to weed out weak banks, Kardouche said. “Going forward there are reasons to be optimistic that the economy will be less dependent on oil,” she said.

“Russia’s middle class has grown exponentially in the last few years and people are getting richer, so fuelling domestic consumption … Households are leveraging up. A mortgage market will exist in the next one to two years.” RAB’s emerging market fund has exposure to energy, financial, consumer and telecoms stocks in Russia.

South Africa is another market investors have been cautious about in recent years. “For a number of years there were genuine concerns related to high unemployment and HIV/AIDS,” Kardouche said.

“There were concerns related to (whether) high black economic empowerment would work in the effective redistribution of wealth … A lot of people were writing South Africa off as a social time bomb.”

Economic growth in South Africa has to a large extent relied on its reserves of precious metals such as gold and platinum, where prices in recent months have also hit record highs. But Kardouche thinks that dependency isn’t as high any more.

“If precious metals prices came back meaningfully it wouldn’t be such a huge problem for the country,” she said. “We are witnessing the rise of the black middle class which in itself is fuelling consumption.” -30-

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