When politics and economics meet

To what extent is there a relationship between politics and economics? The impact of politicians on the finances of a country is one of those areas that can appear somewhat fluid. When an economy is thriving, politicians in power are often quick to claim the credit.

A struggling economy, however, is rarely accepted by those in power as being a sign of errors by the government. Instead, attempts are usually made to blame problems on the global economy, or on issues faced by trading partners.

To a certain extent, this may simply be seen as reflecting the problems that so many people have with modern politicians. Is there a lack of straight talking here?

Last year saw the Hungarian General Election take place, with the usual build-up about how many changes might occur after the election. Viktor Orban was looking to maintain his position as Prime Minister, with his Fidesz party seeking to strengthen its already powerful grip on power. Indeed, the clear victory that had been achieved in the previous election had put Mr Orban in a position where he had a mandate to make constitutional changes.

His leadership appears to have become a cause for concern for a number of Western governments. There had been a suspicion that he had been able to adopt an increasingly authoritarian position and it was noted that he had recently praised the economic performance of a number of nations, including China and Russia.

So where did this leave the likely economic situation? Entering the election, there appeared to be agreement among many analysts that Mr Orban would retain his position. This would provide a sense of stability, despite the concerns of some outsiders.

What transpired was, if anything, to be a strengthening of the Prime Minister’s position, with his party successfully defending seats in April and then following that up with local election successes later in the year. As a result, the Hungarian Prime Minister and his party have a renewed mandate until 2018. How has that been reflected in the reactions of markets in Hungary? What impact has there been on the country’s economy as a whole?

Hungary’s annual GDP growth rate for the past year stands at a respectable 3.4%, with the unemployment rate continuing to be very low. The main index for the Hungarian stock exchange, meanwhile, has witnessed a 13% rise in the year since the election.

So the performance indicators all point to a strengthening positioning. But is this anything more than a coincidence?

If you want to understand the impact of politics on the economy of any country or on the performance of any business, then it’s vital that you should follow the situation carefully. When attempting to invest overseas, it becomes even more critical.

 

The practicalities of Eastern European investment

Nevsky Capital offer an approach to investing in Eastern Europe and many different funds seek to focus on very specific geographical areas. But why should you make use of such funds to manage your own investment approach?

One alternative is to seek to invest directly, relying upon your own knowledge to out-perform the markets. Is this a realistic option for you?

It’s certainly clear than many people do take just such an approach. You’ve probably heard about their success stories, or possibly read blogs from these self-proclaimed gurus. When examining real achievements, these are undoubtedly to be admired. We’re all used to treating some claims with a touch of caution, of course, but that doesn’t make genuine successes any less impressive.

What we tend to hear about rather less is those who do not succeed. There are far fewer blogs about the individuals who have invested a small fortune in Eastern European stocks and shares, only to lose all of that money. That’s not because such individuals don’t exist: it’s simply that they are understandably rather less keen to publicise their circumstances. In fact, those who have failed will undoubtedly out-weigh those who have tasted success.

There was a study carried out some years ago that looked at the performance of 10,000 individual investors. The study sought to measure how their performance levels compared with the professionals.

The results of that study demonstrated that stocks that were sold by amateur investors actually performed 3.2% better than stocks that were bought. That appears to indicate that picking your own stocks and shares doesn’t tend to go well, at least in the case of many investors.

But would you have more success if you were to concentrate your efforts in a particular area? It seems likely that a focus of this sort is likely to pay better dividends, since it would be possible to establish significant expertise. This is where the idea of investing in Eastern Europe may come into play. You would have that opportunity to examine businesses operating in a few markets, with each of those markets being smaller than those in the UK or the United States (to take two obvious examples).

The problems associated with such an approach are not be ignored, of course. If you’re unable to speak local dialects, then that may be seen as being a considerable disadvantage. Fortunately, many online translation services can be used to ensure that you have access to written information relating to your target markets, but it’s much more difficult to follow television news stories or to conduct meaningful interviews.

That last point also hints at problems associated with access to key individuals. Can you get into a position where you can actually interview those in senior management positions or local economists who have a suitable understanding of particular markets? You may face an uphill task, making it incredibly difficult for you to manage your investments in an active, meaningful manner.

So the thought of investing in Eastern Europe may sound incredibly appealing, but the reality can be rather less positive. In order to make the most of investments, it seems sensible that so many people seek to use the services of professionals.