Caution on Eastern Europe

09/09/2008 12:00 am EST


Tom Lydon

Editor and Publisher, ETF Trends

Tom Lydon, editor of ETF Trends, sees a slowdown in Eastern Europe extending to a range of ETFs.

According to the Wall Street Journal, over the past three months, global exchange traded fund (ETF) assets under management shrank by a substantial amount. At the end of July, they had fallen to $786 billion from $805 billion in April, down 2.4%.

The economic troubles that weighed down exchange traded funds started in the United States before spreading to Europe. Now, after a strong run, Eastern Europe could be next to experience a slowdown.

Eastern Europe has been experiencing a bubble all its own, with new private businesses popping up everywhere, and economic and political stability. But the party cannot last forever, wage costs are creeping up, and labor shortages are hurting. The Economist reported that “out-of-date infrastructure, such as Poland’s notorious roads, is actually clogging trade”.
Growth has still managed to stay steady in this region, however, as domestic demand has been up, and [trade within Eastern Europe] has made up for fewer exports to the West. Latvia and Estonia, in particular, experienced breakneck growth in recent years, but the bubbles have popped. Retail sales and industrial production in Latvia are down (8.3% and 6.4%—Editor), while construction has imploded. Inflation is perched at a whopping 17%. At least the gloomier predictions have so far proved to be unfounded. 

Latvia hasn’t been forced to devalue its currency. In Poland, things are starting to recover, as many Poles are returning from Britain, where they had retreated to find work. Growth was up 6.1% for the first quarter and unemployment has all but disappeared after hitting 20% in 2003. The biggest threat is rising interest rates, currently at 6%, which would cause more of an economic slowdown than the previous rate of 4%.

There is no Slovakia exchange traded fund, but access to this region can be had through the Austria ETF. Exchange traded funds covering these regions are:

iShares MSCI Austria (NYSEArca: EWO), down 19.8% so far this year;
SPDR Emerging Europe Fund (AMEX: GUR), down 25.5% in 2008;
Claymore/BNY Mellon Frontier Markets (NYSEArca: FRN), down 12.5% since its June 13th launch, and WisdomTree Emerging Markets High-Yielding Fund (NYSEArca: DEM), down 5.6%.

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