Fledgling markets in shock after the battering of 2008
Published in:
Financial Times
25.01.09
If the central and eastern European markets had their day in the sun in 2007, when local stock markets were booming and inflows to funds were strong, 2008 was more like a total solar eclipse.
With stock markets in freefall and local currencies taking a pasting, money was cascading out of investment funds across the region.
Some markets developed very rapidly, almost without stops. People thought funds were like bank deposits
“The markets saw outflows in all categories and the collapse of a number of bubbles, such as small cap and Russia,” says Nicolas Faller, head of distribution partners at Fortis Investments. “Even bond funds suffered due to higher rates on bank deposits and rising interest rates at the beginning of 2008.”
Figures from the European Fund and Asset Management Association show net outflows of nearly €2bn (£1.9bn, $2.6bn) between December 2007 and September 2008 in Poland, the largest market in the region, and a drop in Polish assets under management of 38.1 per cent.
In non-EU markets, such as Russia and Ukraine, the drop in assets topped 80 per cent, while in Bulgaria they retreated by more than 90 per cent.
And, of course, the fourth-quarter figures are likely to be worse.
Where does this leave these fledgling markets? Will CEE investors, who had become used to double-digit returns on their investments when local stock markets were booming, now take fright and put their savings under the proverbial mattress?
“It has been a shock,” concedes Paul Carr, head of sales for central and south eastern Europe at East Capital. “Some markets developed very rapidly, almost without stops. People thought funds were like bank deposits.”
So did advisers, it would seem. After Lehman Brothers went bust local fixed income markets were frozen and both investors and advisers learnt a few home truths about the markets.
The whole idea of decoupling was slaughtered in 2008
“Many investors were using money market funds as savings accounts with better performance, not realising they could be volatile,” says Johan de Ryck, general director for central and eastern Europe and Russia at KBC Asset Management. “Sales people didn’t realise it either.”
An improvement in the standard of financial advice may therefore be one positive outcome of the crisis. With investors digging deeper for information and more independent advice firms such as AWD and OVB in the market, there may be pressure for more realistic information, though at the moment both banks and independents are basically emphasising whatever sells, which is usually capital guaranteed funds.
The lessons learnt have been harsh, but they have perhaps also been necessary.
“We see this as the start of a learning process,” says Christa Bernbacher, managing director of Raiffeisen International Fund Advisory.
“Until now, most CEE countries have been invested in risky assets, such as equities. Now there is an opportunity for diversification.”
Not all the CEE markets are focused on riskier assets; Hungary and the Czech Republic have conservative investment profiles with 95 per cent of total fund assets in money market or capital guaranteed funds, notes Mr de Ryck. But where equity investment has predominated it has generally been locally focused, meaning investors have taken a hard hit.
What may be expected now is a greater willingness to look at international assets, which previously were not interesting because the local stock markets were performing so well.
“We see possibilities for stronger diversification across asset classes and countries,” says Ms Bernbacher. Initially, however, the focus will be on what is safe.
“Plain vanilla,” says Ms Bernacher when asked to identify future product trends.
“People will invest in very conservative and transparent products that are very clearly structured.”
Mr de Ryck can testify to that. KBC, which has always focused on conservative products, is now the largest asset manager in the region, having overtaken Unicredito/HVB. KBC’s CEE assets rose from €5.8bn in December 2006 to €8.2bn in September 2008, while Unicredito/HVB saw its assets fall by more than €2bn.
This emphasis on the very safe is also a trend in the pensions market, where assets are likely to rise from €51bn in 2006 to €245bn in 2015, according to Allianz Dresdner Economic Research, largely due to the mandatory nature of most CEE second-pillar pension systems.
There is a rise in populism as pension funds lost money or the first time this millennium
CEE pension funds are already invested conservatively, and international players in the region had hoped for a relaxing of asset allocation restrictions, but that now seems unlikely in the short term.
“There is a rise in populism as pension funds lost money for the first time this millennium,” says Mr Faller.
Pension funds are thus likely to stick with a conservative profile and governments have moved to introduce more conservative pension funds for risk-averse or elderly investors.
An additional trend in the region also mitigates in favour of plain vanilla: small local shops set up by fund managers with a good track record are starting to disappear or be bought.
Nonetheless investors in the CEE markets have been used to good returns and ultimately they will want that again. “As soon as the markets see recovery, they will look for better returns,” says Mr de Ryck.
Falling interest rates will help by turning investors off term deposits. But ultimately what is needed is some good economic news from the US and a global market recovery, for if there is one thing that the crisis has shown it is that central and eastern Europe is not insulated from the rest of the world.
“The whole idea of decoupling was slaughtered in 2008,” says Mr Carr. “It’s a small world.”
© Financial Times, 25.01.09