The performance of emerging European markets this year has been strongly influenced by movements of ...
The performance of emerging European markets this year has been strongly influenced by movements of the Nasdaq. However the economic fundamentals are good and still improving and convergence is on track in Central Europe
When Nasdaq started to weaken in March, EMEA markets could not hold against trends set in developed markets.
The correction of the Nasdaq signalled a decrease in the risk appetite of investors world wide. This was the reason why markets with a high level of foreign ownership (Hungary) suffered most.
For Russia in particular, which has comparably low exposure to tech stocks within the EMEA universe, the correction led to very low valuation levels relative to other emerging markets as well as relative to the market's own history.
In terms of convergence the Emerging European Markets (EEM) region is still a mixed bag. The range is wide, with Greece leading the pack as it is soon to join the EMU. At the other end of the range, we see Russia strongly recovering from crisis.
The situation in Turkey is not clear. A self-imposed, IMF-supported reform program is still on track, however, the progress of this has recently lost momentum. The focus on inflation has led to an overvalued currency; exporters have become less competitive, while domestic demand shows first signs of slowing
The central European countries are generally on track. Hungary and Czech Republic now meet most of the Maastricht criteria. Poland, however, is still struggling, particularly with regards to inflation, which is more of a structural problem rather than a monetary problem.
Markets have come down sharply since the end of March. The reasons were mainly global considerations, despite good fundamentals remaining in place. Central Europe remains on track and good fundamentals coinciding with low stock prices, make investments in Eastern European equities highly recommended.
In this environment Russia and Hungary offer the best value. The probability of a further weakening of the euro against the US dollar is decreasing. This should support Eastern European countries since imports are mostly paid in dollars while a high portion of exports is directed towards the EU. Over the next couple of months we expect to see continuing uncertainty concerning the growth and interest rate outlook in the US economy.
This will result in near-term nervousness for investors in the Nasdaq and global emerging markets as appetite for risk remains subdued.
However, if the prospect of a soft landing in the US gathers momentum, investors will be more confident and look once again to the emerging market asset class, in particular to the eastern European region, where the fundamentals remain intact.
Klaus Bockstaller is head of EMEA at Baring Asset Management
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