FYI | Sep 27 2006
What’s happening in Eastern Europe?
Readers of FN Arena News who pay attention to details will have noticed by now that two team members (myself and Rob) carry names that seem to suggest a legacy link with Eastern Europe. The suggestion is correct; we both have a natural interest for the region.
While Australian investors have been bombarded with stories about China and India, this has been much lesser the case in Europe over the past few years. The reason for this is that “developed Europe” (countries such as Germany, Austria, the UK and Belgium) has had its own share of rapid development stories coming from former Communist Block countries such as Lithuania, Poland and Romania.
Rapid economic developments in these Emerging Markets have resulted in increasing investor interest, especially as Western and Middle Europe have been struggling with economic growth ever since the euro was introduced, almost six years ago by now.
Investors in the region have done well as Emerging Markets have clearly outperformed the juggernauts of Europe and the US over the past years. But as everything goes in cycles in life, this may be reversing right now. Some commentators have already drawn comparisons between Eastern Europe today and Asia before the crisis in the late nineties, suggesting this might not just be a trend reversal what we are experiencing; there may be genuine troubles ahead.
Investors better take heed. It’s been a long time since the streets of Budapest were filled with Hungarians demanding the country’s political leaders step down. As I write this week’s editorial a new scandal has broken out in Poland with the government –officially in place to fight corruption- having been caught out trying to “buy” (bribe?) a member of one of the other political parties.
Similar to individual companies, the cockroach theory applies more often to economic sectors or geographical regions than we would like it to. Everyone knows that if one finds a cockroach searching for food in the kitchen, it is more than likely there are at least a few more hiding somewhere nearby, waiting to come out.
In investment jargon each cockroach stands for a negative event.
Judging by the latest assessments of analysts at Lehman Brothers some of the cockroaches may have already spread to other Emerging Markets, Asia in particular. The reason why a switch in sentiment by Lehman Brothers is important is because Lehman analysts have long been proponents of a new paradigm for the region.
Under this new paradigm Asia ex-Japan will become less export dependent with economic growth receiving increasing support from a developing local middle class. And China, not the US, will be at the economic centre of this new era.
Lehman analysts recently revised their view. They still think the new paradigm will happen, but it will develop at a slower pace. They now think a cyclical economic downturn is going to hit the region, delaying the time when Asia ex-Japan will exist on its own merits, not just as a cheap producer for Western consumers.
Reading the latest Lehman report on the region there seem to be enough reasons to suspect there will be some cockroaches popping up in the region in the near term. Lehman talks of a “double whammy hitting the region” in the second half of calendar 2006.
Asian governments absorbed much of the energy costs at first, but over the past year the persistence of high oil prices has forced these governments to pass on more of the costs to local companies and consumers, Lehman says. Even though oil prices have come down recently, they are still high by anyone’s standards.
If that isn’t enough to temper anyone’s enthusiasm, household debt in the region has risen sharply in many countries. Similar to the situation in developed economies, the higher household debt increases the potency of higher interest rates. Lehman notes that in many countries consumer confidence has already weakened. Luckily exports have remained firm so far. But economies in the US and China are slowing…
Reading between the lines Lehman analysts are warning there could be quite some cockroaches popping up in the region over the next few months. In fact, the abovementioned paradigm shift for the region is likely not to happen until the next upswing in global economic growth, the analysts say. The way things are looking now we’ve hardly started to trend down…
It’s probably no surprise then that equity markets in Asia made a big jump today, one day after an index of consumer confidence in the US showed an unexpected positive reading. It’s probably better not to forget we are still looking at a US economy, and thus global growth, to slow down from here onwards – regardless.
The official house stance at Lehman’s, by the way, is that the Federal Reserve will hike interest rates one more time, in January next year, because of further growing inflation.
GaveKal predicted earlier already that Asia ex-Japan is likely to perform better than Latin-America among the Emerging Markets from now on. The researchers did suggest this may, in practice, turn out as performing less negative relative to US equities.
Quite a few experts have been advocating a switch in US equities over the past few months and it would seem the list is getting longer by the day.
I picked up one interesting saying from a GaveKal report this week I hadn’t heard or read before (probably because I don’t spend enough time with Jewish investors): “sell before Rosh Hashanah (September 22-24) and buy after Yom Kippur (October 2)”.
Global equities are bouncing back, however, no time to wait until Monday (when there’s a holiday in this part of the world).
Till next week!
Your I prefer a kitchen with no cockroaches myself editor,
Rudi Filapek-Vandyck
(as always supported by the Fab Four: Chris, Greg, Terry and Rob)