It has not been an easy time for the developed markets in the past couple of years, and especially not in the last couple of weeks following the fallout from WorldCom. But while the mainstream markets have been suffering, emerging and eastern Europe have surged ahead, with Russia in the vanguard. The S&P/IFCI East Europe index has risen by over 55% in dollar terms over the year to May, according to the latest figures from Standard&Poor’s. The S&P/IFCI Emerging Europe index rose by 26% in that time.
Not surprisingly as they chase returns to try to recover some of the poor performance in the developed markets, fund managers have been stepping up their involvement in central and eastern Europe. Several European players including Allianz, BNP Paribas, Raiffeisen and SEB have been launching new funds to cover the markets. Other investment houses have increased exposure through their existing funds and have focused on those countries that are most likely to join the EU next.
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Despite this, fund managers have not yet been able to transmit their enthusiasm to end investors. Cash inflows to Europe, Middle East and Africa portfolios have not kept pace with money pouring into more globally diversified emerging market funds. The performance in EMEA markets has been driven by Russian equities in the main. The Russian rise has been inspired by the rise in the price of oil.
There is a concern, though, that funds are all chasing the same targets. This means portfolios tend to resemble each other, says S&P, and returns are clustering around the median. Those managers prepared to stick their necks out have consequently either dramatically beaten or underperformed the competition.
James Tew, European head of research at S&P, says EMEA remains a small sector but it is growing. He says it is a pity that investors have overlooked it, given the gains the markets have been making.
“Many investors who have backed them have tended to be well rewarded for their risk,” says Tew. “Groups such as Baring, JPMorgan Fleming, Raiffeisen and Schroder have all stayed the course in these volatile markets and have achieved some of the strongest relative performances in the sector.”
And despite the successes in these markets, there is not a great deal of optimism among S&P analysts that money will start to flow in more freely.
“Despite their recent strong performances, it is unlikely that even the more stable emerging European markets will attract a significant increase in interest among retail investors until western developed markets show clearer evidence of a sustainable recovery,” says Peter Fuller, lead analyst for EMEA funds.
