The GFC

The global financial crisis is referred to as the GFC throughout Asia. The fact that they have an abbreviation for the worst crisis since depression is curious but it is so much more striking that it was not really a global crisis nor only a financial one but rather a an economic and financial crisis that hit the developed world in general and Europe in particular.

Most countries in Asia managed to keep up growth last year and when traveling around in emerging Asia – I visited Hong Kong, Seoul and Singapore during the past week – it is obvious that these countries have managed the crisis relatively well and are aware of it. I also visited Tokyo, which was hit harder by the crisis and also worries a lot about its high level of debt even though it is safe for the time being since it is primarily held by domestic institutions and is easy and cheap to finance.

There are many similarities between emerging Asia in 1998 and emerging Europe in 2009. Both regions suffered from large economic imbalances resulting in sharp economic contraction when these imbalances had to be adjusted. The result in Asia was that the economies came out leaner and stronger and managed to grow more sustainably the following decade and thus managed the GFC better than almost any other region in the world.

There is reason to believe that Eastern Europe will experience something similar. The difference is that the contraction in Eastern Europe was not as deep but, on the other hand, many of its trading partners have been hit hard as well and currencies have not depreciated as much making an export-led recovery more difficult.

The Image Problem

Having met investors across Asia during the past week, I am more convinced than ever that Eastern Europe and Russia suffers from a serious image problem. At this time around last year, investors in Asia hesitated about Russia and Eastern Europe because the economic fundamentals in the region did not look so appealing. Now, most investors agree that the economic as well as the market fundamentals are quite attractive but they still hesitate. The Eurozone debt problems make everything in the European timezone look rather unattractive, not the least because of the depreciating currencies across Europe, and there is a whole set of real and perceived issues in Russia that make potential investors in Asia reluctant.

The fact that Eastern European economic fundamentals are better than those in Western Europe, on growth but especially on debt and fiscal consolidation, and that Russia is trading at such a huge discount to EM peers surprise most investors since they have not even cared to look at the region lately. But it may not be enough to convince them in the short term as they still see less risky opportunities in other emerging markets. China and India are obvious preferences but Russia has been losing out to Brazil.

Things are changing though. Flows to global emerging markets have turned much more positive towards Eastern Europe this year – after having been disfavored for most of 2009 – at the expense of Asia and particularly Latin America. Qualified investors are appreciating the attractive fundamentals and say that “one should really buy Russia at these levels” but then add some institutional hesitation. It is frustrating when investment decisions are based on sentiment rather than on fundamentals but it should eventually change.