Emerging Markets equities continue to rise

Most equity markets in Emerging Markets continued to rise over the past two months, outperforming developed equity markets overall.

• This was driven primarily by Chinese equities,

• but Brazil and some European Emerging Markets also performed well.

• Poland and Hungary, for example, have been among the top performers since the beginning of the year, even though Poland saw a slight downward correction in August.

• India, one of the big favourites of international investors and a country that has seen strong growth in recent years, is treading water this year with significantly below-average price performance.

Chinese equities rise despite weaker economic data

Economic data has been mixed in recent weeks, but on a global level it signals a slight upturn in growth, particularly in the US. In China, on the other hand, economic data has been weaker across the board, especially in retail, but also in industrial production. Deflationary trends in producer and consumer prices are intensifying. Nevertheless, consumption in China has grown at an above-average rate in recent years and accounts for around 40% of GDP, the highest figure in 20 years. For many observers, and also the leadership in Beijing, this is still clearly too little, but at least the trend is moving in the right direction. Despite US tariffs, there has been no sign of a slump in Chinese exports so far. Although direct trade with the US is declining (around 14% since the beginning of the year), other regions and exports to the US via third countries seem to be compensating for this thus far. In any case, the ASEAN countries are China's main trading partners, followed by Europe. Exports of machinery and high-quality goods are currently growing particularly strongly. However, there are big question marks over China's growth in the coming year which could even slip below 4%.

Is a new, multipolar world order emerging?

The meeting of the SCO (Shanghai Cooperation Organisation) states in China in August, with a historic summit and show of solidarity between the heads of state of Russia, China and India, attracted a lot of attention and may represent a watershed moment in geopolitics. There is a lot to say on this, and we will therefore address it in more detail in the next Emerging Markets update. For now, however, we want to focus on the current trends and prospects in the Central and Eastern European region, specifically from the perspective of equity investors.

Poland experiences growth spurt

In our view, Poland is the most important country in the region for the foreseeable future. At the end of 2024, an EU-friendly government came to power and, as a result, the country will have access to frozen EU funds of up to €76 billion in the coming years. 2025 will be the first full year in which these EU funds will flow into the Polish economy. In addition, low-interest loans of up to almost €44 billion will come from the EU's new programme, and Poland is expected to benefit from the planned massive investments in infrastructure, climate protection and the military in neighbouring Germany. As a country that is less dependent on exports and more focused on its domestic economy, Poland is also less affected by the US government's tariff increases on the EU. As a result, Poland is expected to see economic growth of around three to three and a half per cent this year and the next. This is well above the EU average. These growth prospects, combined with very favourable valuations on the equity market have given Polish equity prices a strong boost over the past 12 months.

Hopes for an end to the war in Ukraine

In addition, hopes for an impending end to the fighting in Ukraine were fueled by the actions of US President Trump. These hopes have so far been disappointed. However, this still offers considerable upside potential in the coming years, while the potential for negative surprises seems quite manageable. Speaking of negative surprises, the Polish stock market was recently hit by a temporary tax increase on bank profits in Poland. This, together with disappointed hopes for Ukraine, is likely to have been a trigger for the slight downward correction on the equity market in recent weeks.

The region must be viewed in a differentiated manner

We continue to view many Polish companies, including banks, as promising, with still comparatively favorable and solid growth potential.

However, we are currently less positive, and for the time being rather neutral, about Hungary. Although the equtiy market has also performed very well, Hungary currently still lacks much of the tailwind that Poland is enjoying. The EU continues to withhold considerable funds. Hungary's highly export-dependent economy is suffering from Trump's tariffs, continued weak growth in Germany and Austria, and sluggish demand for electric cars. Inflation, which remains too high, is an additional burden and limits the central bank's scope for interest rate cuts. Although Budapest has significantly intensified its cooperation with China, Chinese investors are now putting the brakes on some major projects in Hungary.

Change of power in Hungary?

Overall, the bottom line is that despite some significant price increases over the past two years, the equity markets in Central and Eastern Europe still show a considerable valuation discount compared to developed markets and some – in the case of Poland, for example – have significantly better growth prospects.

Although the customs agreement between the EU and the US is weighing on many companies in the region, the negative effects appear to be manageable. This has consequently at least removed uncertainties and created planning security. A settlement of the war in Ukraine or a permanent ceasefire would be the icing on the cake. Having said that, a good selection of companies and sectors remains essential, and the ongoing geopolitical and economic risks should also be taken into account.