30.09.2010

 Martin Zezula, Portfolio Manager, Raiffeisenbank, Czech Republic

WIOF Emerging Europe Performance Fund

fund OF THE MONTH - OCTOBER, NOVEMBER 2010

The Emerging Europe (CEE), consisting of countries located in Central, Eastern and South-Eastern Europe, is a region that has experienced an enormous step forward over the last 15 years or more: successful transition from centrally planned economies to functioning market economy systems. With the exception of 2008-2009 worldwide financial crisis, it consistently achieves one of the strongest growth paces in the world. The same comparison may be also used in the area of investment. If you invest in the Emerging Europe region, the potential future performance is a stunning. However, the taken risk is also high, which could be seen in development of last two years. Apart from “traditional” investment risks, the investor needs to be aware of above‑average liquidity risks, troubling namely stock exchanges in South-Eastern Europe. On the other hand, major Central European countries – Poland and Czech Republic – are treated in a prominent group of “advanced emerging markets” by FTSE (together with e.g. Brazil and South Africa), indicating the improved level of regulation and conditions for entry of capital.

Economic outlook

The key value driver in CEE region is (not just economic) convergence to developed countries standards. Helped by massive FDI inflows, the region’s average GDP per capita (recalculated to EUR at PPP) in comparison to the Euro-zone increased from 36% in 2001 to current ca. 44% and 46% expected for 2011. Hence, the potential for further growth is far from being exhausted.

In addition, Russia, with its vast commodity reserves, belongs to the powers which directly influence the global economy and capital markets. Dominant areas are mineral resources headed by crude oil and natural gas (energy stocks account for 71% of MICEX index). Continued demand for commodities, especially from Asia, should be another factor driving Russian stocks up.

CEE below Maastricht public dept threshold

In these times, investors worry about the sustainability of economic recovery in relation to the swelling level of government debt. The key idea is that the measures adopted in many countries with the aim of improving state finances (like spending cuts and tax increases) obviously have a negative effect on future growth. Nevertheless, the fiscal position of CEE is better when compared to the developed world, which is one of the reasons why the region’s GDP growth is expected to outperform in both 2010 and 2011.

Capital market

EM Europe Stocks are attractive at this moment in time. Despite last year’s rally (MSCI EM added 69,9 pct in EUR), emerging markets are not expensive on a traditional valuation basis. Furthermore, Emerging Europe seems to be a bargain in comparison to Latin America and Asia. Scenarios of double-dip recession (discussed intensively by investors in recent weeks and months) will most likely not materialize, which will be reflected in gradually rising stock prices. Ample liquidity and attractive valuations (measured e.g. by price-to-earnings ratio, P/E) will act in the same direction, but in the current uncertain market sentiment they are relegated to the back seat.

 Stock Market Perfomance (in EUR; % yoyo)

 

Stock Market Perfomance (in EUR; % yoyo)

Notice: Past performance is not guarantee of future returns.

Within the CEE region, there are mounting signs of twin-speed recovery. Poland and Russia should remain ahead of the pack, whereas the Czech Republic and Slovakia will tread the middle ground – they are highly exposed to a slowdown in the Euro-zone’s core (and Germany in particular), but household and corporate balance sheets are relatively healthy and banks in both countries are in fairly good shape. By contrast, the legacy of the last decade’s credit boom means that the outlook for the Baltics, Balkans and Hungary is altogether less rosy. Hence, within the WIOF Emerging Europe Performance Fund, the shifts from overweighed South-Eastern Europe (inheritance of the recent fund merger) to Central Europe and Russia would continue. Yet given all the above mentioned, Emerging Europe can be expected to remain on a growth path in the years to come.

WIOF Emerging Europe Performance Fund = the Fund of „Endless“ Opportunities

Due to extensive knowledge of local conditions, the fund is managed by Raiffeisenbank a.s. (“Raiffeisenbank“), an important banking institution that provides a wide range of banking services to private and corporate clientele in the Czech Republic. Raiffeisenbank is a member of the Austrian Raiffeisen Financial Group with more than a 140-year history. Raiffeisen Financial Group belongs among the strongest financial institutions for commercial and investment banking in all of Central and Eastern Europe, and currently operates in 17 countries.

Exposure to the Emerging Europe Region belongs to each globally diversified investment portfolio. Should the investment risk be sufficiently spread, the WIOF Emerging Europe Performance Fund should not be missing from a client’s investment portfolio. The fund itself is one of the more risky funds but in a complete portfolio it has a role that cannot be substituted. Using the WIOF Emerging Europe Performance Fund, you can significantly increase your portfolio performance.

Legal Notice : This document is designed for the professional advisers only. This document is not an invitation to subscribe for units or shares in the funds described herein and is by way of information only. Past performance is not a guide to the future. The value of investments, and the income from them, can go down as well as up. You may not get back the amount you have invested. You should be aware that currency fluctuations, either up or down, may also affect the value of an investment. The mention of any specific shares should not be taken as a recommendation to deal. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Yields are not guaranteed and can fluctuate. Net asset value information has been obtained from sources believed to be reliable but WIOF makes no representation to its accuracy, reliability or completeness and accepts no liability for any direct or indirect loss arising from its use. WIOF and Cornhill Management International S.A. assume no liability for the correctness or accuracy of the given information and it may be subject to change at any time, without notice. Performance shown does not take account of any fees and costs associated with subscribing or redeeming shares. It is assumed that all dividends were reinvested. Before investing in any WIOF Sub-fund(s) investors should contact their financial adviser and refer to all relevant documents relating to the particular Sub-fund(s), such as the latest annual or semi-annual report and/or simplified prospectus, which specify the particular risks associated with the Sub-fund, together with any specific restrictions applying, and the basis of dealing.