Last year markets priced in a systemic meltdown of emerging Europe. A crisis was sweeping the region, as high external debts, leveraged financial systems, low or moderate foreign exchange reserves and rapidly contracting economies set off panic.
Sell-side researchers responded by emphasizing the distinction between structurally weaker economies – the Baltics, Balkans, Ukraine, Kazakhstan and to a lesser extent Hungary – and the stronger economies – the likes of Poland, Turkey, Russia and central Europe.
Researchers unleashed a stream of reports on the state of domestic banking systems and international policy efforts to address the crisis. But few were willing to stick their necks out and counter the overwhelming doom.
Barclays Capital naturally deserves credit for its bullish calls on emerging markets, in general, through its “green shoots” of recovery call in March 2009. Meanwhile, Citigroup, Deutsche Bank and UniCredit made constructive calls on the medium-term fundamentals of eastern Europe or provided intelligence on western bank exposures in the region.
However, UBS in February 2009 challenged the bearish narrative in the media and financial markets – that also portended doom for western Europe’s banking system – by correctly arguing that orderly sovereign defaults in the Baltics and Balkans were more likely than an outright meltdown that would trigger a collapse in domestic exchange rate arrangements.
UBS correctly forecast that a depreciation of the ruble and higher interest rates to stem capital flight would help stabilize the economy, even as Russia’s Micex exchange plummeted and, at various points, was shut down by the authorities. (Renaissance Capital was the most accurate firm on Russian exchange rate policy by correctly predicting in January that the central bank would discontinue a controlled devaluation of the currency and allow market forces to determine its bottom. This policy, as RenCap correctly predicted, set off a gradual rise in its value.)
In July 2009, to determine the turning points in the regional business cycle, UBS’s EMEA (Europe, the Middle East and Africa) economic team, led by Reinhard Cluse and Clemens Grafe, set up their own lead economic indicators for Russia, Turkey, Israel, South Africa, Poland, Hungary and the Czech Republic. The index weighted various factors, including business surveys, stock market indices and industrial production, to gauge the strength of economic activity and turning points in the business cycle.
The survey inspired the team to say EMEA’s crisis was over in July 2009, arguing correctly that Russia, Turkey, Hungary and Czech Republic were in firm recovery mode.
These stock markets have subsequently staged massive rallies, and the survey is now updated on a monthly basis. The team are more cautious on the EMEA region amid fears of lower advanced economy growth, but note the Czech Republic and Poland are showing some resilience thanks to German economic links, while Hungary and Turkey’s business sentiment has declined since May. After failing to warn of the impending EMEA crash – an issue on which all sell-side researchers erred – UBS has provided constructive and compelling commentary on the region in the post-crisis environment.