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Emerging European economies resilient in the face of the global recession

The resilience of the underlying economies in Emerging Europe has been one of the more positive surprises to come out of the global recession. Matthias Siller, manager of Baring Emerging Europe plc (BEE) says, “During the recent results season, earnings across the Emerging Europe universe generally beat expectations. At the same time, the economic growth outlook for the region has been revised up. Indeed, it looks as though some parts of Emerging Europe, specifically Poland, central Europe’s largest economy, will not shrink in 2009.”

Matthias explains: “The Emerging European economies are strengthening in part due to the massive monetary stimulus in markets across the region. Since late 2008, Turkish interest rates have been cut dramatically and interest rates in Central Europe have also fallen, albeit not to the same extent. In Russia, interest rates have been slashed recently. Importantly, whilst these economies were fighting significant global headwinds, domestic governments, particularly the Russian government, had the money to spend on economic support initiatives.

“A buoyant export sector and domestic market also add to the region’s resilience. The export sector has improved due to Germany’s quick economic recovery (much of Central Europe’s export industry is focused on Germany) and the continuous opportunities arising from the urbanisation of China. We expect those sectors relying on exports to experience volatility in the short term but the long term story remains promising.”

Matthias continues: “The domestic market in the Emerging European region is also proving resilient. Whilst consumers in the West are over-burdened with debt, the situation across most of our investment universe is completely different. Consumers in Central and Eastern Europe carry a fraction of the level of debt of their western counterparts. Furthermore, consumption has held up quite well during the crisis; consumers may be down but they are definitely not out.

“In Russia, there may be a temporary halt in the growth of the middle class but we still expect it to expand rapidly over the medium-term as wage growth returns. The resilience of domestic consumption elsewhere in the region (again we would highlight Poland) has been noteworthy. Overall, it’s important to get recent events into context; 2009 has been a year of adjustment for the emerging market consumer, but not a year of fundamental change.”

Many of the major players in Emerging Europe – most notably Turkey, Poland and Russia – have recovered from the financial crisis much quicker than their Western counterparts.

Matthias comments: “In Turkey, the population is growing fast and we expect consumption to increase to meet pent up demand. There is significant and growing demand for mortgages and consumer products. The resilience of the country’s banking sector has been impressive. It may take time before the extent of the change dawns on many investors but we are very positive on the long-term prospects for Turkish financials.

“Poland’s resilience to the economic shocks has also been better than anticipated. Poland is the only eastern member of the EU to avoid a recession since the start of the financial crisis as a result of its broad-based, large scale economy and timely income rate tax cuts which stimulated the economy. These positive factors were important to Poland as they proved that it is not dependent on foreign investors to prop up the economy.

“Russia experienced a severe contraction in GDP over 2008 and many investors questioned how it was going to return to its original growth levels of around 8%. However, the Russian economy is displaying a pronounced bounce which is pointing towards a ‘V’ shaped recovery. The extent of the recovery is surprising but demonstrates that the government’s fiscal stimulus has proved successful.”

Matthias concludes: “Overall, the Emerging European business model has been proven. The social, political and economic systems have remained stable, even under extreme duress. This supports the belief that long term growth prospects exist in the region.

“Emerging Europe is regaining its competitive edge as labour prices have taken a knock-back, increasing the chances of further foreign investment which in time will strengthen the position of the consumer. This investment will be aided by the close ties with Western Europe. Emerging European consumers are looking more and more attractive particularly as they are virtually debt free compared to their Western European counterparts.”

Baring Emerging Europe plc, formally Baring Emerging Europe Trust, was launched in 2002 with the aim of achieving long-term capital growth, principally through investment in Emerging European securities. Baring Emerging Europe plc has returned 17.7% since inception in January 1994, while the MSCI Emerging Europe 10/40 Index has returned 7.3% over the same period*.

*Source: All annualised performance: Barings as at 31.08.2009 on a NAV per share basis.

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