The resilience of the underlying economy in 'Emerging Europe' has been one of the more positive surprises to come out of the global recession, says Barings Asset Management.

Matthias Siller, manager of Baring Emerging Europe plc (BEE) believes that, during the recent results season, earnings across the Emerging Europe universe generally beat expectations.

At the same time, the economic growth outlook for the region has been upwardly revised. Indeed, it looks as though some parts of Emerging Europe, specifically Poland, central Europe’s largest economy, will not shrink in 2009.

Siller explains, ‘The emerging European economies are strengthening in part due to the massive monetary stimulus in markets across the region. Since late 2008, Turkish interest rates have been cut dramatically and interest rates in Central Europe have also fallen, albeit not to the same extent. In Russia, interest rates have been slashed recently. Importantly, whilst these economies were fighting significant global headwinds, domestic governments, particularly the Russian government, had the money to spend on economic support initiatives.

‘A buoyant export sector and domestic market also add to the region’s resilience. The export sector has improved due to Germany’s quick economic recovery (much of Central Europe’s export industry is focused on Germany) and the continuous opportunities arising from the urbanisation of China. We expect those sectors relying on exports to experience volatility in the short term but the long term story remains promising.’

The domestic market in the Emerging Europe region is also proving resilient. Whilst consumers in the West are over-burdened with debt, the situation across most of the fund’s investment universe is completely different.

Consumers in Central and Eastern Europe carry a fraction of the level of debt of their western counterparts. Furthermore, consumption has held up quite well during the crisis; consumers may be down but they are definitely not out.

‘In Russia, there may be a temporary halt in the growth of the middle class but we still expect it to expand rapidly over the medium-term as wage growth returns,’ says Siller. ‘The resilience of domestic consumption elsewhere in the region (again we would highlight Poland) has been noteworthy. Overall, it’s important to get recent events into context; 2009 has been a year of adjustment for the emerging market consumer, but not a year of fundamental change.’