Fallout from Ukraine conflict could hit growth

The only country that is expected to deliver rather uninspiring growth is Russia, where GDP is predicted to increase by less than 0.5 per cent compared with a rise of 1 per cent in 2013.

In terms of the region’s recent equity market performance, markets have experienced high volatility, which was mainly connected to the newsflow from political developments in Ukraine and Russia’s involvement in the conflict.

The best-performing market up to August 30 this year has been Turkey, with the MSCI Turkey index returning more than 20 per cent in US dollar terms.

The strong market performance is largely due to the country’s improved political outlook after the overwhelming victory of its ruling party in local elections in March 2014.

Market performance has also been driven by fund inflows as international investors switched exposure from Russia to Turkey.

The Czech Republic was another strong performer with an 11 per cent return.

The weakest performers were Hungary, with its MSCI index declining by 15 per cent, and Russia, with the MSCI Russia index falling 14 per cent.

The Polish market lost 2 per cent during the same period.

The major concern for investors in eastern Europe at the moment is the development of the Ukraine-Russia conflict.

The sanctions introduced by the US and the European Union, and subsequently by Russia, will have an impact across the region.

Among most eastern European countries, the dependence on Russian exports is not large.

But one factor that needs to be taken into account is the high dependency on Russian gas in eastern Europe. Any disruptions in the supply of gas from Russia could have a significant impact on the region’s economies.

While short-term uncertainties may continue, the long-term outlook for the region remains positive.

Focusing on individual markets, the economic outlook for Poland is positive, with GDP growth expected to be 2.7 per cent in 2014 and 3.5 per cent in 2015.

The country’s economy, as is the case with most central European countries, is strongly driven by exports to Germany. But the impact of the Russia-Ukraine conflict on the Polish economy remains uncertain.

It has been forecast that just the introduction of the food export ban to Russia will result in a 0.2 per cent decline in GDP growth – food exports from Poland to Russia account for 0.6 per cent of the nation’s total exports.

Mark Mobius is executive chairman of Templeton Emerging Markets Group

MARKETS TO WATCH EASTERN EUROPE

Mark Mobius, executive chairman of Templeton Emerging Markets Group, highlights the pros and cons of eastern European markets for investors:

POLAND

In terms of investments, there could be a significant rise in infrastructure spending in 2015-16, once the new European Union (EU) fund inflows are utilised. Donald Tusk, who was the first Polish prime minister to win a second term since the collapse of communism in 1989, has recently taken his seat as the European Council president. This event could lead to some uncertainty surrounding Polish parliamentary elections in October 2015 and the current coalition losing its majority.

HUNGARY

Investment in manufacturing and infrastructure is expected to drive momentum in economic growth in Hungary. GDP growth of 3 per cent in 2014 and 2.4 per cent in 2015 will be spurred by an expected €22bn (£17.2bn) in EU fund inflows in 2014-20, which is equivalent to roughly 20 per cent of 2012’s GDP. The economy is highly geared to Germany – exports to that country represent about 20 per cent of Hungary’s total exports. Therefore, the nation’s economic performance is strongly tied to the general condition of the EU’s biggest economy.

CZECH REPUBLIC

The Czech Republic’s GDP is expected to grow by 2.4 per cent in 2014 and 2.7 per cent in 2015, which is mainly driven by improvements in private consumption and exports. The nation will also benefit from the expected €22bn in EU fund inflows in 2014-20, which is equivalent to 15 per cent of 2012’s GDP. The Czech Republic is also highly geared to Germany – exports to that country represent close to 25 per cent of GDP.

TURKEY

The Turkish economy is expected to increase by roughly 3 per cent in 2014 and 4 per cent in 2015. Exports have started losing momentum partly due to geopolitical issues (especially in Iraq) and general weakness in global demand. In contrast, domestic demand has been recovering, mainly as a result of a decline in lending interest rates. Interest rates are expected to be lower in the latter part of 2014, further supporting domestic demand. However, turmoil in Iraq continues to affect regional stability and could lead to higher oil prices.

RUSSIA

The Russian economy is expected to grow by only 0.4 per cent in 2014 and 1 per cent in 2015, with import substitution partially offsetting the sharp slowdown in domestic demand. The recovery of growth is subject to, and very much dependent on, developments in the Russia-Ukraine conflict. A key factor is the sanctions imposed on Russia by the western countries. So far, the US/EU sanctions cover all major state-owned banks, as well as selective energy companies and commodity producers. It has been estimated that the ban of food and agriculture products imports could lead to an increase of as much as 1 per cent in consumer prices.