Euroscepticism in the Czech Republic: A Central European Disaster Or Hot Air?

The rise of euroscepticism in Central Europe has been well documented, particularly in the Czech Republic. Among the nations of the Visegrad Four, anti-EU sentiments have long provided easy fuel for political actors willing to appeal to populist instincts to secure political power, but rarely do such sentiments crystallize into concrete anti-European movements. In the Czech Republic, however, political instability and populist rhetoric employed at the highest level is frequently warned against as a harbinger for a potential earthquake in Czech – and potentially Central European – relations with the EU. But how likely is such an event in real terms?

It is no secret that the Czech Republic harbours one of the highest levels of eurosceptic sentiment in the European Union, a fact which has drawn plenty of analytical attention from outsiders and – particularly in light of the tectonic consequences of the Brexit referendum in 2016 – no end of warnings and extrapolations by parties concerned that a similar ‘Czexit’ referendum could very well take place. In the immediate term, it is certainly justifiable for external investors and third parties to be concerned by Czech euroscepticism as an economic and political risk; Eurobarometer has historically recorded significant levels of discontent with the EU both pre- and post-accession, which has never appreciably declined, and in late 2017 36% of Czechs recorded were unhappy with their status as an EU member, the highest percentage of any EU Member State.

The roots of Euroscepticism

Euroscepticism in Czech is an ongoing study; whilst the country benefits enormously from EU funding, the EU is nevertheless often held as the cause of economic woes by a salient portion of the Czech populace. Grassroots resentment over inequalities in salary between the Czech Republic and neighbour countries (for example, in Germany, where an occupation as sales assistant can yield a salary five times greater than its Czech counterpart) is widespread.

Socially, the story is similar: the advent of Brussels-imposed migration quotas in 2015 was almost universally poorly received in the Czech Republic, where anti-migrant and Islamophobic sentiment is extremely widespread, and to this day the migrant quota debacle has dramatically deteriorated Czech perceptions of EU membership, regardless of the fact that the migration quotas were rejected by the Czech government, and that Czech economy and society continues to benefit from and grow with the aid of EU funding programmes.

Potential outcomes

The EU continues to be scapegoated by Czech politicians seeking support from the eurosceptic vote. In real terms, the consequences of this may be dramatic: persistent whispers at the highest levels of Czech politics calling for a Czexit referendum suggests that Czech euroscepticism could, if unchecked, become the groundswell behind an anti-EU movement that eventually leads to a referendum on Union membership with dramatic consequences.

However, whilst the victory of Czech President Miloš Zeman in the January elections of this year, and the reappointment of Andrei Babiš to the post of Prime Minister were received by European analysts as indicators that euroscepticism is gaining ground steadily, the reality may be quite different. Both Mr. Zeman and Mr. Babiš stand to gain very little from a Czech departure from the European Union; Mr. Babiš in particular is unlikely to follow through with any threatened referendum on Czech membership given his economic interests in remaining within the EU. In particular, however, it is noticeable that both Mr. Zeman and Mr. Babiš have distanced themselves publically from the extreme anti-EU voices within the Czech government, refusing to enter into cooperation with hardline or single-policy parties advocating for EU departure. Following the 2018 presidential election results, only one extreme eurosceptic party entered the Lower House of the Czech Parliament, the SPD (Freedom and Direct Democracy) party under Tonio Okamura.

Ahead of the October 2018 Czech parliamentary elections, the outlook on the future of Czech euroscepticism may not be as negative as has been posited by some analyses. As long as political movers rely upon the European Union’s status as scapegoat – whether in the form of President Zeman’s reprimands over perceived bureaucratic incompetence in Brussels, or Prime Minister Babiš’ invocation of the sensitive subject of migration quotas – to build their support base, Czech euroscepticism will be considered a potential risk to EU-Czech relations and the interests of external actors in the Czech Republic. However, those with the greatest power in Czech politics – although perfectly content to utilise euroscepticism and populism as tools in their political arsenal – are very well aware of the damage a Czech departure from the European Union would cause to the Czech Republic.

 

Louis is a political analyst and researcher currently based in Prague, Czech Republic. He has worked previously as political advisor in one of the major political groups in the European Parliament, assigned to the Foreign Affairs, Security and Defense and Human Rights committees.

Inaccessible Markets: Which Frontier And Emerging Countries May Soon Be Tracked By More ETFs

Of the 24 countries classified as emerging markets by MSCI, there are 13 which have only a single dedicated ETF available to US investors. The list includes major markets like South Africa, which houses the sixth largest stock exchange in emerging markets and has a market cap of over $1 trillion.

The iShares MSCI South Africa ETF (EZA) – the only ETF tracking the South African market that is traded on US exchanges – tracks the MSCI South Africa Index, which is comprised of 53 constituents. There are no sector or theme-based funds tracking the market even though there are 18 indices on the local exchange, according to Bloomberg data.

The MSCI South Africa IMI Index, which has 111 constituents across various market caps could be an interesting option for an ETF with an even broader based exposure to a market which is currently underrepresented.

It’s not to say that ETFs investing in South Africa or other countries with just one dedicated fund like Chile are not attracting investor interest. Aside from the six largest Chinese ETFs out of the 31 funds focused on China (KBA) (PEK), the EZA and iShares MSCI Chile Capped ETF (ECH) are bigger than all others. They are larger than ETFs investing in Argentina (ARGT) (AGT) and Colombia (GXG) (ICOL) as well, both of which have two ETFs each tracking their markets.

In the graph above, single country ETFs like that for Turkey (TUR), Thailand (THD), and a frontier market like Vietnam (VNM) all feature among the largest funds in this segment.

Untouched corners

The MSCI country indices for Hungary and Czech Republic, both emerging markets, have done well in YTD 2017, having returned 35% and 18% respectively. However, there are not currently ETFs listed on US markets that would allow investors to partake in the strong performance of these countries.

The broad-based fund route does not help either. The most exposure one could get for these countries is 4.7% for Hungary and 2.5% for Czech Republic.

As far as frontier markets are concerned, there are only three countries with dedicated ETFs out of the 33 that MSCI classifies in that category – Argentina, Vietnam, and Nigeria.

Time for a relook?

There remains noticeable pockets in the frontier and emerging markets universe that can be turned into investment avenues.

Investor interest should not be a big hurdle, as the lone ETFs tracking some of the larger markets have had good traction and are considerably larger than a majority of funds tracking much bigger and popular markets.

The launch of the AGT in April this year made Argentina the first frontier market to have two ETFs tracking it. Its asset size growth would be of interest to fund companies looking at launching single-country funds for similar or even larger markets except for China, India, and Brazil.

Thus, it may be time to relook at the present offerings and think about deepening the number and scope of offerings for markets which have done well over the medium to long-term and can thus find traction.

ESG Scorecard: Czech Republic, Taiwan & Poland Are the Top 3 Emerging Markets

According to RobecoSAM’s October 2016 survey judging the sustainability of economies based on environmental, social, and governance (ESG) indicators, the Czech Republic leads while Nigeria (NGE) lags the global ranking of the 62 countries surveyed. With an overall score of 6+ (out of 10), the Czech Republic leads the emerging markets (EEM) (VWO) on environmental, social, and governance or ESG indicators.

The Czech Republic leads the performers

The Czech Republic (EWEM) ranked 20 on the country sustainability ranking as per RobecoSAM October 2016 survey. Closer introspection reveals that the Czech Republic scored 5+ under all heads, that is, governance, social & environmental; while scoring particularly well on the world risk index and political stability indicators.

[stockdio-historical-chart stockExchange=”NYSENasdaq” width=”100%” symbol=”CETV” displayPrices=”Lines” performance=”true” from=”2017-01-01″ to=”2017-04-25″ allowPeriodChange=”true” height=”350px” culture=”English-US”]

Moreover, leading indicators suggest that the Czech economy is experiencing a phase of healthy expansion, with manufacturing growing steadily and consumption supported by a tight labor market and rising wages. The Prague stock exchange index has returned 10.2% YTD (as of April 24), with the materials sector company, Unipetrol AS (UNPTY) up 37.27%, and Central European Media Enterprises Ltd. (CETV), and Fortuna Entertainment Group up 33.86% and 30% YTD, respectively, from the consumer discretionary sector (which is up 20%). The market is relatively cheap trading at a price to earnings multiple of 13.31; with stocks of Unipetrol AS and Fortuna Entertainment Group trade at a P/E of 5.74 and 22.52, respectively. Central European Media Enterprises Ltd. trades on NASDAQ under the ticker CETV. The ADR has returned 43.35% YTD; 28.26% over the past month (as of April 24).

Other sustainable emerging markets

At rank 21, Taiwan (EWT) too scored well on the ESG indicators, having scored particularly high on the governance indicators such as political stability, corruption, and competitiveness.

Poland (EPOL), South Korea (EWY) & Chile (ECHare the other emerging markets that rank well on the ESG barometer. At ranks 26, 27, and 30, respectively, these markets boast of:

Poland: a 5+ score under all three heads, an appropriately balanced economy

South Korea: a socially sustainable and positive economy with a 6+ score on social indicators such as the human development index, and social unrest.

Chile: At rank 30, Chile scored particularly well on governance metrics.

Let’s now take a look at the laggards in the ESG rankings.

Confucianism Lands In The Czech Republic

Eyebrows were raised earlier this year in the Czech Republic when CEFC China Energy, one of China’s biggest private corporations, invested in a local financial services conglomerate in Europe’s fastest growing economy. It soon became abundantly clear that there may be a larger game at hand by early September, when the Chinese firm snapped up a Czech brewery, a football club, and a stake in the nation’s largest airline operators all in one week. A clue surfaced just days before this latest purchase was announced, when Czech President Miloš Zeman made an appearance at a Beijing military parade commemorating World War II – the only Western leader in attendance.

So what’s next? Back in Beijing, plans are also being finalized to invest in local communication and media companies, Medea Group and Empresa Media, respectively. A Bank of China branch was also recently opened in Prague. Increasingly it appears that Prague’s airport may become a gateway for business travelers and tourists from across East Asia. The first direct flight between Prague and Beijing is due to begin operations in late September. That may be just the tip of the iceberg, though. CEFC coined the term “three-in-one” management, which stands for entrepreneurship, Confucianism, and military-style regimentation. With a firm like that increasing its presence, there are sure to be more developments on the horizon.