However, as we approached the middle of the year the story changed and the situation for the developing economies of Europe began to deteriorate rapidly. From the peak on 19 May 2008 to 23 January 2009 the MSCI Eastern Europe Index lost a massive 65.97 per cent.
Performance of the MSCI Eastern Europe, World and Eastern Europe indices over the past year
Source: Financial Express Analytics
The overall result for 2008 was that the market indices of several countries, including Bulgaria, Lithuania, Romania and Ukraine, dropped 75 per cent. In all other countries but Slovakia, stocks lost about half their value. Several countries, including Hungary and Ukraine, have had to seek financial aid from the International Monetary Fund.
Funds
There are a small number of UK Unit Trusts and OEICs focused on Emerging Europe. The countries which make up the geographical remit of these funds are those that were part of the former Eastern-bloc, as well as Greece and Turkey.
The most popular stocks within the portfolios of these funds are in the oil and gas, financials and telecoms sectors.
Most popular stocks within Emerging Europe portfolios
| Gazprom | Oil&Gas |
| Lukoil | Oil&Gas |
| CEZ | Oil&Gas |
| Sberbank of Russia |
Financials |
| Telekomunikacja Polska |
Telecoms |
| Mobile Telesystems |
Telecoms |
Source: Financial Express Analytics
However, the sharp decline in energy prices, the global credit crunch as well as the escalating political risk in many countries have prompted investors to flee the Emerging European markets.
Of the five funds focused on Emerging Europe, it is Fidelity’s Emerging Europe, Middle East and Africa fund which has performed the best. Buoyed by the performance of the Middle East and Africa region, this fund has lost 37.10 per cent in the last twelve months compared with losses ranging from 53.55 per cent for Invesco Perpetual’s Emerging Europe fund to a return of -61.23 per cent for JPM New Europe.
Performance of Emerging Europe funds since May 2008
| Fund | % Return |
| Credit Suisse European Frontiers |
-63.97% |
| Fidelity Emerging Europe, Middle East, Africa |
-44.82% |
| Invesco Perpetual Emerging Europe |
-62.94% |
| JPM New Europe |
-68.75% |
| Jupiter Emerging Europe Opportunities |
-60.98% |
Source: Financial Express Analytics
This data from Financial Express Analytics shows how the inclusion of the Middle East and Africa regions into the Fidelity portfolio has prevented the fund from experiencing losses as great as those suffered by the funds focused only on Emerging Europe.
But beyond the obvious difference in regions, there lies some very interesting variations in the portfolios of these funds – variations which have led some funds to perform better than others.
For example, there is huge variation in the proportion of the portfolios allocated to Basic Materials. The JPM fund has 31.40 per cent in this sector, whereas Invesco Perpetual’s offering has just 2.4 per cent.
Moreover, the JPM fund has just 0.6 per cent allocated to the more defensive Healthcare sector while Invesco Perpetual Emerging Europe has 8.6 per cent.
Liesbeth Rubinstein, fund manager of Invesco Perpetual Emerging Europe says: "Our focus in keeping the portfolio defensively positioned remains intact. We still favour companies that are likely to show resilience in this type of environment, such as tobacco firms, consumer staples, telecoms and pharmaceuticals. With commodity prices still under pressure we see no reason to adjust our underweight position in the energy and materials sectors."
There is no doubt that all funds with a large proportion of their assets invested in this region have suffered badly but the funds which have positioned their portfolios more defensively have not suffered as much as those which have kept in aggressive sectors.
Outlook
During the last month, whilst continuing to lose money, the funds investing in Emerging Europe have been much less volatile. Notably, Turkey and the countries of central Europe have performed well.
In addition, many fund managers and analysts have been suggesting that valuations are now extremely attractive for investors with a long-term view. There are many quality companies trading around or less than the book value of their assets.
Despite these indications of change, the outlook for funds focused on Emerging Europe remains bleak for 2009. The performance of these funds will continue to struggle largely due to the significant allocation given over to Russian stocks in the portfolios of Emerging Europe funds. A number of factors including the Central Bank of Russia devaluing the Rouble, falling consumer confidence and the continuing underperformance of gas stocks mean that the Russian economy is a long way from recovery.