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Eastern and Western Europe ETFs Feel the Credit Crunch

by: Tom Lydon August 31, 2008 | about stocks: ADRU / DEM / EWO / FRN / GUR / PEF / PWD / VEA / VGK    
Tom Lydon

Tom Lydon

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Eastern Europe, ETFs Feel the U.S. Credit Crunch

The economic troubles that weighed down ETFs started here in the U.S. before spreading to Europe. Now, after a strong run, Eastern Europe could be next up to experience a slowdown.

Eastern Europe has been experiencing a bubble all its own, with new private businesses popping up everywhere, and economic and political stability. But the party cannot last forever, and wage costs are creeping up, labor shortages are hurting, and infrastructure keeps on aging, which is actually stopping up Poland’s trade, says The Economist.

Growth has still managed to stay steady in this region, however, as domestic demand has been up, and intra-East European trade has made up for fewer exports in the West.

Latvia and Estonia in particular experienced breakneck growth in recent years, but the bubbles have popped. Retail sales and industrial production in Latvia are down, while construction has imploded. Inflation is perched at a whopping 17%. At least the gloomier predictions have so par proved to be unfounded. Latvia hasn’t been forced to devalue.

In Poland, things are starting to recover, as many Poles are returning from Britain, where they had retreated to find work. Growth was up 6.1% for the first quarter, and unemployment has all but disappeared after hitting 20% in 2003. The biggest threat is rising interest rates, which would cause more of an economic slowdown than the previous rate of 4% , currently at 6%.

There is no Slovakia ETF, but access to this region can be had through the Austria ETF.

ETFs covering these regions are:

  • iShares MSCI Austria (EWO), down 19.8% year-to-date
  • SPDR Emerging Europe Fund (GUR), down 25.5% year-to-date
  • Claymore/BNY Mellon Frontier Markets (FRN), down 12.5% since June 13th inception
  • WisdomTree Emerging Markets High-Yielding Fund (DEM), down 5.6%

Europe ETFs Hit By Credit Crisis, and They Aren’t Happy

Like many areas around the globe, Europe is getting crunched hard by the credit crisis, and ETFs focusing on this region are suffering.

Figures released in mid-August showed that the euro-zone economy shriveled to an annualized rate of 0.8% during the second quarter. It was the biggest reversal since 2001.

Purchasing and manufacturing data are reflecting this slump, consumer confidence is low, and business confidence within the three largest European economies - Germany, France and Italy - is lagging, reports The Economist. Germany’s downturn is causing particular dismay, since it was one of the few countries that sidestepped the global house-price boom.

In general, the sentiment for the global credit crunch is blamed on America. Many Europeans, Germans in particular, feel that they do not deserve this reversal of fortune, as they did not create this situation. But one economist says that Germany profited from the credit-fueled boom and were part of the game.

Elsewhere in Europe, housing mania took hold, but Ireland’s bust might be the most dramatic of all. Its GDP grew 6% in 2007, but is on pace to shrink this year.

Euro inflation fell to 3.8% in August from a record high of 4% in June and July, offering some glimmer of hope.

  • Vanguard Europe Pacific ETF (VEA), down 16.8% year-to-date
  • BLDRs Europe 100 ADR Index Fund (ADRU), down 17.7% year-to-date
  • Vanguard European ETF (VGK), down 17.8% year-to-date
  • PowerShares FTSE RAFI Europe Portfolio (PEF), down 20.8% year-to-date
  • PowerShares FTSE RAFI Europe Small-Mid Portfolio (PWD), down 21.6% year-to-date

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