In 1999, we have noted an increasing level of divergence between the markets in central and eastern Europe. There has been a division within the region of “converging” markets (Hungary, Poland, the Czech Republic and Greece) and “emerging” markets. There has also been a severance of the link between Russia and the core markets. Russia has increasingly followed its own agenda, driven by different dynamics such as the political situation and the oil price. The core European markets have also followed different dynamics, with macroeconomic indicators a key factor dictating asset allocation shifts throughout the year.
We therefore note a steady increase in the Polish weighting until July when concern over the current account deficit and currency depreciation contributed to a shift towards Hungary where the macroeconomic picture was starting to improve. Hungary, as a more open, export-oriented economy, was also perceived to be the prime beneficiary of stronger GDP growth in Germany, its chief export market. The reduction in its weighting as at the end of March is largely due to the Kosovo crisis as US investors sold down the market.
A fairly steady weighting has been maintained in the Czech Republic as the economy has started to show signs of bottoming out from its lengthy recession. Initiatives by the government to reactivate the privatisation process and resolve the banks’ non-performing loan problems have also served to attract investor interest. Poor liquidity and a shortage of investable stocks hinders greater flows.
Russia saw a large increase in its average weighting because of strong underlying market performance – the market was ahead by 114.73% for the six months to the end of June, when it started to fall back once again – and investment inflows into the market as an oil price play.
The average Turkish weighting has shown the greatest level of change. February saw the capture of Kurdish separatist leader Abdullah Öcalan, which caused the market to rally as it was anticipated that this would lead to a decisive election victory for caretaker prime minister Bülent Ecevit. This was indeed the case in April. The market maintained a stronger weighting until August, when uncertainty over the economic impact of the earthquake had a negative impact. Turkey still features as one of the favoured markets in the region on the view that it could well re-rate dramatically upwards if substantial funding is awarded by the IMF and other world bodies and this leads to significantly lower inflation and yields.
The average Greek weighting reflects growing concern in March–April about the unsustainable level of valuations. At that time it started to fall back despite the market’s steady upward trend.
The average cash weighting has remained at a fairly low level for most of the year as different markets have taken turns to attract inflows. Richard Newell