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LETTER TO SHAREHOLDERS
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May 28, 1997
Dear Shareholder,
We are pleased to present to shareholders of The Emerging Germany Fund Inc.
the Fund's report for the quarter ended March 31, 1997.
Low interest rates, improved corporate earnings and increased liquidity
inflows propelled the German equity market to record highs in the first quarter
1997. Exports continued to serve as the main engine of growth for the German
economy, and helped offset the effects of weak private consumption, high
unemployment and ongoing public spending cuts.
Our outlook for the German stock market remains positive in view of a
favorable interest rate environment, the development of an increasingly
energetic equity culture and the overall underrepresentation in the equity
markets of domestic and foreign institutional investors.
At the end of the first quarter 1997, the Fund had a net asset value of $161.3
million, or $11.52 per share, compared with $149.3 million or $10.66 per share,
net of a dividend of $0.02 per share, at year-end 1996. This represented a gain
in net asset value of 8.1% in the first quarter, compared with a gain in the
DAX100 Index of 9.7% in dollar terms. The market price of the Fund's shares
increased by 7.7% to $8.75.
At March 31, 1997, the Fund's invested position comprised 99.6% of net assets
and consisted of 44 common stocks and five preferred stocks of German companies.
We thank our shareholders for their continued interest and support.
Sincerely,
<TABLE>
<S> <C>
[SIGNATURE] [SIGNATURE]
Rolf Passow William S. Stack
Chairman President
</TABLE>
1
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MANAGEMENT DISCUSSION
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STOCK MARKET
In the first quarter of 1997 the German stock market reached record highs.
Improved earnings forecasts, low interest rates and liquidity inflows provided
strong support. The DAX Index gained more than 18% in DM terms.
Steel companies showed the strongest performance, achieving a return of more
than 30% in the first quarter, in large part due to the announced merger of the
steel production areas of Thyssen and Krupp-Hoesch. The automobile sector also
outperformed the market with a return of 29%. Companies in the technology,
retail, finance, construction and insurance industries also outperformed the
market, while the utility, chemical and machinery industries underperformed.
We believe that the prospects for the German equity market remain favorable.
Low interest rates are an incentive and major domestic and foreign investors are
still underrepresented in the German equity market. The Spezialfonds, tax-driven
investment vehicles for German institutions and insurance companies, exhibit a
growing tendency to switch out of bonds into stocks. Moreover, Spezialfonds are
enjoying a brisk inflow of funds, as are equity funds open to the public.
ECONOMY
The release of economic data on GDP growth and its component parts for the
fourth quarter of 1996 made clear the relative weaknesses and strengths of the
German economy. Weak areas include private consumption, which was hit by a
combination of low wage increases, high social security contributions and high
unemployment. Also weak was the construction sector, which was hit by cold
weather, the expiration of several tax subsidies and lower public sector
investment in eastern Germany. In addition, government spending fell 0.6% as a
result of Germany's drive to meet the Maastricht criteria.
The strongest growth stimulus came from exports, which rose nearly 5% in the
fourth quarter of 1996. Available indicators for the current year support our
view that growth will continue to be driven by exports. Nonetheless, we believe
that economic growth may be held back by continuing weak consumer demand given
the high unemployment rate of more than 11% and continuing spending cuts in the
public sector in order to meet the Maastricht deficit target. Although the
increase in German prices accelerated temporarily in the beginning of the year
due to weather-related factors (higher prices for food and heating oil), the
inflation rate is generally expected to remain at last year's level of around
1.5%.
Finally, in the present economic environment we believe there is little reason
for the Bundesbank to change its interest rate policy. In the eyes of the
Bundesbank, the recent weakening of the DM has already provided sufficient
growth stimulus. Further monetary easing would also harbor the risk of
accelerating currency depreciation and, with inflation likely to remain at its
current low levels and only moderate growth expectations for the overall
economy, there is even less reason to expect a rate hike.
PERFORMANCE REVIEW
In the first quarter of 1997, the Fund's net asset value gained 8.1% compared
with a rise in dollar terms of 9.5% in the DAX, 9.7% in the DAX100 and 11.4% in
the MSCI Germany Index. The market price of the Fund's shares increased 7.7% to
$8.75.
One of the main reasons for the relative underperformance in the first quarter
was the extraordinary rise of Allianz following a long period of
underperformance. Allianz's share price gained almost 10% in
2
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less than one week, and helped raise the whole insurance industry in which the
Fund had been underweighted. Chemicals showed a relative underperformance in the
first quarter after a very strong 1996, and the Fund's exposure to the chemical
sector is substantial. In addition, the Fund had a limited exposure to a number
of companies that performed well in the first quarter 1997. They included
several small companies with a history of weak performance which rallied in the
first quarter from their very low levels.
Sixt, a car rental company, was the best performer in the Fund's portfolio
with a gain of approximately 80% in the first quarter. Volkswagen was also an
excellent performer with a return of more than 45%. Disappointing, by contrast,
was Hoechst which, after rising by 116% in 1996, suffered in the first quarter
of 1997.
Against the economic background of strong export growth, particularly in the
auto industry, the Fund continued to increase its exposure to the automobile
industry by increasing its positions in Volkswagen and Daimler and by acquiring
new positions in BMW and Kolbenschmidt, a manufacturer of motor vehicle parts.
Daimler and Volkswagen were among the largest portfolio holdings at the end of
the first quarter and together represented 14% of the Fund's net assets.
The largest industry class in the Fund's portfolio is chemicals. In view of
continuing cost cutting and corporate restructuring, our outlook for the
chemical industry remains positive. Nevertheless, we have slightly pared down
our chemicals exposure in the wake of a very strong 1996. We also reduced our
weighting in the health care sector by trimming the position in Altana and by
selling the positions in Schering and Gehe.
The Fund remains slightly overweighted in banks. We believe that there is a
high probability of consolidation among banks due to the industry's need to cut
costs and enhance its global competitiveness. In the insurance industry we
increased our positions in Allianz and Munchener Ruckversicherung. In
transportation services we increased our weighting in Sixt and eliminated the
position in Lufthansa. In industrial equipment, we sold the position in Buderus.
In the utilities industry, we reduced the weighting in Rheinelektra.
Our strategy remains focused on export-oriented companies. In this respect we
acquired Vossloh, a manufacturer of rail-track components and machining units
for railway wheel sets and a service provider to the rail sector. More than 70%
of Vossloh's sales in the transport technology division is generated outside
Germany. Companies with a primarily domestic emphasis are minimally represented
in the portfolio.
3
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Stocks of the following companies represented the Fund's ten largest positions
at March 31, 1997:
<TABLE>
<CAPTION>
MARKET VALUE PERCENT OF
COMPANY IN USD NET ASSETS
- -------------------------------------------------- ------------ ----------
<S> <C> <C>
Daimler-Benz AG................................... $ 12,797,698 7.9%
Allianz AG Holding................................ 9,811,578 6.1
Volkswagen AG..................................... 9,674,421 6.0
Bayer AG.......................................... 9,362,633 5.8
Veba AG........................................... 8,494,724 5.3
Hoechst AG........................................ 8,100,492 5.0
SAP AG............................................ 7,657,393 4.7
BASF AG........................................... 6,610,505 4.1
Deutsche Bank AG.................................. 6,474,697 4.0
Bayerische Hypotheken- und Wechsel-Bank AG........ 6,117,340 3.8
------------ ---
$ 85,101,481 52.7%
------------ ---
------------ ---
</TABLE>
PERCENT OF NET ASSETS BY INDUSTRY
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY CLASS NET ASSETS
- ---------------------------------------------------------------------------------------------------- ---------------
<S> <C>
Automotive Related.................................................................................. 16.6%
Banking............................................................................................. 15.0
Building and Construction........................................................................... 2.4
Chemicals and Textiles.............................................................................. 17.3
Communication Services.............................................................................. 2.0
Drugs and Hospital Supplies......................................................................... 2.6
Electrical Equipment................................................................................ 0.4
Electronics and New Technology...................................................................... 0.4
General Retail...................................................................................... 1.2
Household/Related Non-Durables...................................................................... 3.7
Industrial Equipment................................................................................ 6.6
Insurance........................................................................................... 11.4
Media Services...................................................................................... 0.6
Other Consumer Durables............................................................................. 0.9
Raw and Basic Materials............................................................................. 4.1
Technology Services................................................................................. 4.7
Transportation Services............................................................................. 0.9
Utilities........................................................................................... 8.8
---
Percent of Net Assets............................................................................. 99.6%
---
---
</TABLE>
OTHER MATTERS
The Fund's 1996 Annual Report erroneously listed the Fund's portfolio turnover
rate at 90% for the fiscal year ended December 31, 1996. The rate for such
period was in fact 51%.
In addition, the shareholder proposal addressing the discount to net asset
value and submitted for shareholder approval at the Fund's 1997 Annual Meeting
did not carry. Of the Fund's 7,332,143 shares voting on the proposal, 2,708,991
shares were cast for, 3,607,076 shares were cast against, and 1,016,076 shares
abstained from voting on the proposal.
4
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THE EMERGING GERMANY FUND INC.
INVESTMENTS IN SECURITIES AND NET ASSETS
MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
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<C> <S> <C>
SHARES EQUITY INVESTMENTS MARKET VALUE
<CAPTION>
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<C> <S> <C>
CONSUMER DURABLES SECTOR--17.5%
AUTOMOTIVE RELATED--16.6%
1,500 Bayerische Motoren Werke AG............. $ 1,232,972
100,000 Continental AG **....................... 2,224,487
160,000 Daimler-Benz AG *....................... 12,797,698
50,000 Kolbenschmidt AG *...................... 869,409
17,500 Volkswagen AG........................... 9,674,421
-------------------
26,798,987
-------------------
OTHER CONSUMER DURABLES--0.9%
5,000 Friedrich Grohe AG Pfd.................. 1,549,946
-------------------
CONSUMER NON-DURABLES SECTOR--4.9%
GENERAL RETAIL--1.2%
50,000 Douglas Holding AG...................... 1,855,738
-------------------
HOUSEHOLD/RELATED
NON-DURABLES--3.7%
15,000 Adidas AG............................... 1,704,341
1,500 Hugo Boss AG Pfd. **.................... 2,050,606
4,000 Wella AG................................ 2,194,508
-------------------
5,949,455
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CYCLICAL/CAPITAL GOODS SECTOR--31.3%
BUILDING AND CONSTRUCTION--2.4%
7,000 Dyckerhoff AG Pfd. **................... 2,530,879
30,000 Industrieverwaltungs-Gesellschaft AG.... 1,039,693
7,500 Industrieverwaltungs-Gesellschaft AG New
*..................................... 247,332
-------------------
3,817,904
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CHEMICALS AND TEXTILES--17.3%
175,000 BASF AG................................. 6,610,505
225,000 Bayer AG................................ 9,362,633
15,000 Henkel KGaA Pfd......................... 827,437
15,724 Henkel KGaA *........................... 802,322
200,000 Hoechst AG **........................... 8,100,492
70,000 SKW Trostberg AG **..................... 2,245,473
-------------------
27,948,862
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INDUSTRIAL EQUIPMENT--6.6%
47,500 Durr AG................................. 1,780,040
5,000 IWKA AG................................. 1,217,172
2,500 Linde AG................................ 1,761,302
8,500 Mannesmann AG........................... 3,251,589
50,000 Siemens AG.............................. 2,695,167
-------------------
10,705,270
-------------------
<CAPTION>
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SHARES EQUITY INVESTMENTS MARKET VALUE
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<C> <S> <C>
RAW AND BASIC MATERIALS--4.1%
2,500 Degussa AG.............................. $ 1,067,274
7,500 Fried, Krupp AG Hoesch-Krupp **......... 1,461,506
30,000 SGL Carbon AG........................... 4,119,199
-------------------
6,647,979
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TRANSPORTATION SERVICES--0.9%
1,920 Sixt AG................................. 1,151,217
500 Sixt AG Pfd............................. 299,796
-------------------
1,451,013
-------------------
HEALTHCARE SECTOR--2.6%
DRUGS AND HOSPITAL SUPPLIES--2.6%
3,000 Altana AG............................... 2,403,166
22,500 Schwarz Pharma AG....................... 1,767,298
-------------------
4,170,464
-------------------
INTEREST-SENSITIVE SECTOR--35.2%
BANKING--15.0%
175,000 Bayerische Hypotheken- und Wechsel-Bank
AG.................................... 6,117,340
120,000 Bayerische Vereinsbank AG **............ 4,971,819
125,000 BHF-Bank AG **.......................... 3,259,534
50,000 Commerzbank AG.......................... 1,439,021
115,000 Deutsche Bank AG........................ 6,474,697
35,000 DT Pfandbrief- und Hypothekenbank AG.... 1,899,209
-------------------
24,161,620
-------------------
INSURANCE--11.4%
4,750 Allianz AG Holding...................... 9,811,578
17,500 CKAG Colonia Konzern AG................. 1,647,380
3,000 DBV Holding AG.......................... 1,077,467
2,250 Munchener Ruckversicherungs-Gesellschaft
AG.................................... 5,855,019
-------------------
18,391,444
-------------------
UTILITIES--8.8%
1,000 Rheinelektra AG......................... 737,499
110,000 RWE AG.................................. 4,910,361
150,000 Veba AG................................. 8,494,724
-------------------
14,142,584
-------------------
TELEMEDIA/SERVICES SECTOR--2.6%
COMMUNICATION SERVICES--2.0%
150,000 Deutsche Telekom AG *................... 3,281,250
-------------------
MEDIA SERVICES--0.6%
1,250 Axel Springer Verlag AG................. 929,368
-------------------
</TABLE>
5
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<TABLE>
<CAPTION>
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SHARES EQUITY INVESTMENTS MARKET VALUE
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<C> <S> <C>
TECHNOLOGY SECTOR--5.5%
ELECTRICAL EQUIPMENT--0.4%
15,000 Vossloh AG.............................. $ 611,584
-------------------
ELECTRONICS AND NEW TECHNOLOGY--0.4%
15,000 eff-eff Fritz Fuss GmbH & Co.
KGaA.................................. 647,560
-------------------
TECHNOLOGY SERVICES--4.7%
45,000 SAP AG.................................. 7,657,393
-------------------
Total Equity Investments
(Cost $122,477,976)--
99.6%................................. 160,718,421
Other Assets Less Liabilities--0.4%..... 627,519
-------------------
Net Assets--100.00%..................... $ 161,345,940
-------------------
-------------------
</TABLE>
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Percentages are of net assets.
* Non-income producing security.
** Part of this security is on loan.
6
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THE EMERGING GERMANY FUND INC.
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BOARD OF DIRECTORS
Rolf Passow, Chairman*
Robert J. Birnbaum
Carroll Brown
Theodore J. Coburn
James E. Dowd**
Alfred W. Fiore
George N. Fugelsang*
Siegfried A. Kessler**
Gottfried W. Perbix**
Jacob Saliba
* Interested person within the meaning of the Investment Company Act of 1940
** Member, Audit Committee
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OFFICERS
William S. Stack, President
Barbel Lenz, Vice President
Alexandra Simou, Secretary
Caroline M. Hirst, Treasurer and Assistant Secretary
Judith W. O'Connell, Assistant Treasurer
Jennie M. Wong, Assistant Treasurer
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INVESTMENT MANAGER
RCM Capital Management, L.L.C.
Four Embarcadero Center
San Francisco, California 94111
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CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DIVIDEND PAYING AGENT
TRANSFER AGENT AND REGISTRAR
State Street Bank and Trust Company
P.O. Box 8209
Boston, Massachusetts 02266-8209
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
LEGAL COUNSEL
Shaw, Pittman, Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
<PAGE>
THE EMERGING GERMANY FUND INC.
SUMMARY OF GENERAL
INFORMATION
- ---------------------------------------
SHAREHOLDER INFORMATION
Daily market prices for the Fund's shares are published in the New York
Exchange Composite Transaction section of THE WALL STREET JOURNAL (designation
"EmergGerFd" under the letter "G"). The Fund's NYSE trading symbol is "FRG."
Weekly comparative net asset value (NAV) and market price information about the
Fund is published each Monday in THE WALL STREET JOURNAL, each Sunday in THE NEW
YORK TIMES, as well as in BARRON'S and other newspapers in a table called
"Closed End Funds." Additional information about the Fund is available by
calling 1-800-356-6122.
DIVIDEND REINVESTMENT PLAN
Through the Fund's voluntary Dividend Reinvestment Plan, shareholders may
elect to receive dividends and capital gains distributions in the form of
additional shares of the Fund. A brochure describing the Plan is available from
the Plan Agent, State Street Bank and Trust Company, by calling 1-800-426-5523.
This report is furnished to shareholders of The Emerging Germany Fund
Inc. for their information. This is not a prospectus, circular or
representation intended for use in the purchase or sale of shares of the
Fund or any securities mentioned in this report.
All references in this report to "dollars" or "$" are to United States
dollars.
Comparisons between changes in the Fund's net asset value per share
and changes in the DAX100 Index should be considered in light of the
Fund's investment objective and policies, the characteristics and
quality of the Fund's investments, the size of the Fund and variations
in the Deutsche Mark/ dollar exchange rate.
[LOGO]
THE EMERGING
GERMANY FUND INC.
QUARTERLY REPORT
MARCH 31, 1997
