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.

 

Eastern European IPO trends

The relative state of Initial Public Offering (IPO) transactions is seen by some analysts as presenting a measure of how well individual markets are performing. Are businesses keen to float on the stock market? Do investors feel confident enough to plunge their own capital into such businesses?

It has not gone unnoticed that IPO levels have dropped significantly in many Eastern European markets in recent months. From the Ukraine to the Czech Republic, it seems like there is a waning appetite for such flotations. What lies behind the trend?

Wider economic uncertainties are certainly not helpful in this context. While investors fret about the future direction of countries and the region as a whole, they may well feel that this is not be best time to invest. Conditions are unlikely to be conducive to strong performance from individual entrepreneurs either. There may be an element here of new businesses struggling to emerge from the shadows.

A global economy means that IPOs aren’t just about local investors, of course. For those examining options on a broad scale, Eastern European transactions may represent too much of a risk right now. Although there’s always that balance between risk and reward, many evidently feel that the scales have been tipped too far in one direction here.

The state of the Russian economy continues to give cause for concern and sanctions are proving limiting, in terms of economic growth. There is also evidence that the impact here is not only limited to Russia: perhaps unsurprisingly, there are knock-on effects for trading partners elsewhere, particularly within Eastern Europe.

At present, equity valuations tend to be low. Some companies will have responded to this situation by looking to delay IPOs, believing that valuations will increase once the current circumstances subside. There are certainly many anxious glances in the direction of the Ukraine at the moment, with senior managers in many businesses hoping to see greater stability in the medium-term.

Could a few large IPOs trigger others to follow suit? The recent flotation of Wizz Air, the Hungarian budget airline, has given some cause for optimism. Could it represent a sign of confidence returning to the markets? It’s probably too early to tell, but there seems little chance of a rapid recovery in IPO levels for the most part.

Consideration also needs to be given to the privatisation process that has been ongoing in some countries. Taking Poland as an obvious example, recent years have seen Polish governments looking to privatise on a large scale. There may simply be little left to privatise, reducing the potential for this as a source of IPOs. The same is true in Romania, where it’s been noted that the sale of assets has certainly reduced in recent months.

What does the future hold? That’s always the question that most investors want to know the answer to. Looking into a crystal ball, it would appear that the most likely answer here is that the uncertainty that surrounds the economies of the region means that there doesn’t seem to be much chance of IPO levels increasing at a significant rate during the course of the coming months. If the Ukraine situation, in particular, starts to settle down, then that may well present cause for economic optimism.

Nevsky Capital

The Nevsky Eastern European Fund continues to focus on a range of investments in companies based in the key states of Eastern Europe.

Martin Taylor Nevsky

So what does the future hold for the fund? That’s clearly something that’s of interest to visitors and that many analysts will be looking to consider. This blog largely focuses on the historic performance of this Nevsky Capital fund, but it’s certainly believed that the factsheet information that is displayed here can also give an insight into the future.

By studying past performance, it’s obviously possible to get an indication of the investments that are made and the approach that the fund managers make to such investments. Is it possible to predict future performance, based on this evidence?

Making such claims would appear to be a step too far. Past performance is exacty that: it relates to the past. It doesn’t necessarily paint a picture of what the future has in store.

Without the benefit of a crystal ball, however, it’s impossible to know what the future may hold for businesses in Russia, the Czech Republic, or elsewhere in Europe. When investing in a fund, we are all essentially relying on the knowledge of the fund managers to get us the results that we require.

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