The year ended on a positive note for emerging markets, which once again outperformed their develope...
The year ended on a positive note for emerging markets, which once again outperformed their developed counterparts in the final three months of 2002.
The main theme of the quarter was undoubtedly in emerging Europe, as EU accession negotiations culminated in the successful conclusion of the Copenhagen Summit on 13 December 2002.
As it stands, the first referendum for accession to the EU is for Hungary in April, with the Czech Republic and Poland potentially in June.
The latest polls still show strong support for EU accession and we believe there is minimal risk of a negative surprise.
However, this will remain a key investment theme for the region going forward. It is possible that voters in Hungary, the Czech Republic and Poland will decline to accede although this looks unlikely based on current public opinion.
A related investment theme is expected to be the fiscal health of countries expected to join the EU.
In Poland, the progress made by the government has been disappointing to date. A recent cabinet reshuffle has seen the removal of the ineffective privatisation minister and the finance minister. It is hoped the changes will result in fiscal measures that are more conducive to privatisation.
Similarly the budget deficit has hit the headlines in Hungary where it is estimated to be 9.4% of GDP for 2002.
This has resulted from excessive fiscal stimulus because it has been an election year. The government has reiterated its 2003 target of a 4.5% deficit which appears to be ambitious, although the planned EU membership should help to focus the government's efforts.
The Czech Republic expects its fiscal deficit to be about 5.5% of GDP but as they intend to join EMU later than their Hungarian neighbours the impetus to drive through reforms is relatively weaker.
We believe the long-term prospects for these candidate countries are encouraging, but our favoured market in the region is still Russia.
Although we expect some slowdown in reforms as we approach elections in 2004 we believe that further progress is still likely especially with Putin's popularity remaining high.
From here, the fundamental investment case for the emerging European asset class remains in place, although investors remain concerned about the possibility of a double-dip recession, deflation and a war in the Gulf. Although war with Iraq remains a concern, fears about the other two factors are probably exaggerated.
Nevertheless, monetary policy has been relaxed in the US and EU, which should help to boost economic growth.
In addition, the recently announced tax relief package in the US supports our belief that the government will be proactive to ensure that this growth occurs.
Emerging markets outperformed.
First referendum for accession to EU in April.
Basic investment case remains in place.
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