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LETTER TO SHAREHOLDERS
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November 25, 1998
Dear Shareholder,
We are pleased to present to shareholders of The Emerging Germany Fund Inc.
the Fund's report for the quarter ended September 30, 1998.
The German equity market started the third quarter with strong performance.
However, along with most markets around the world, the German market corrected
sharply in late July. As the Asian crisis spread to Russia, resulting in the
devaluation of the ruble and a moratorium on Russian government debt securities,
the world markets experienced a sharp sell-off. This trend continued through
early October in part as a result of excessive de-leveraging within the
financial sector. The German market has since experienced a sharp rebound from
its third-quarter lows following a shift towards monetary easing globally.
At September 30, 1998, the Fund had net assets of $202,204,238 or $14.43 per
share, compared with $244,661,835 million or $17.47 per share at the beginning
of the quarter. In the third quarter 1998, the Fund's net asset value and market
price returned -15.3% and -18.8%, respectively, compared with a return in the
DAX100 Index of -17.5% in dollar terms. For the first nine months of 1998, the
Fund's net asset value and market price returned 20.4% and 13.2%, respectively,
compared with a return of 12.6% in the DAX100 Index and 14.6% in the
MSCI-Germany.
Pursuant to the Fund's distribution policy, the Board declared a quarterly
dividend of $0.42 per share paid on October 20, 1998 to shareholders of record
on October 12, 1998.
We thank our shareholders for their continued interest and support.
[SIG] [SIG]
Rolf Passow William S. Stack
Chairman President
1
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MANAGEMENT DISCUSSION
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STOCK MARKET REVIEW
In the beginning of the third quarter, German indices reached all-time highs.
Through July 21, the DAX Index rose by more than 45%. After this peak, the
German markets faced a sharp sell-off. By October 10, the DAX lost more than a
35% from its July 21 peak. Relative to bonds, German equities had fallen back to
the levels of the early 1980s. The sell-off was mainly triggered by the crisis
inside the financial sector (partly due to excessive leverage) and less as a
result of real economic problems. What had dragged the markets down had been an
aggressive bout of de-leveraging, and this had prompted an unpredicted rise in
risk aversion. Domestic and defensive stocks outperformed in the sell-off. For
instance, the retail, insurance and utility sectors declined by only 10% to 15%
compared to the banking and construction sector which lost more than 30% and a
24% decline in the DAX Index. One of the worst performing stocks in the third
quarter was Deutsche Bank with a decline of almost 44%.
The technical bounce in the market was not surprising, as market levels in
early October appeared to be discounting a stream of bad news. A combination of
high cash levels and monetary easing has led to this sharp rebound. German
equities recovered by more than 20% from their early October lows. We are
hopeful that a continuation of the current monetary policy worldwide will
support a stabilization of financial markets until the end of the year. Despite
the slower growth prospects and an overall downward revision in earnings, we
expect positive development in equity markets in Europe. This should be helped
by recent rate cuts by the European Central Bank ("ECB"), a continuation of
restructuring measures, and an acceleration of share buy-backs after recent tax
and legislative changes in Germany, France and the U.K.
ECONOMY
Developments in the global economy are beginning to have a greater influence
on the economic prospects for Germany and Euroland as a whole. Business
sentiment is deteriorating in the EMU states, as evidenced by recent corporate
surveys which show increased skepticism. The turmoil in the world economy has
led to a series of downward revisions in GDP growth in Europe. Prospects for
exports in Europe to non-European regions have deteriorated after the recent
U.S. dollar plunge. However, exchange rate stability within the Euro area is
limiting the exchange rate risk for exporters within the EMU countries. Given
the weaker export outlook, a recovery in domestic demand is the key to
sustaining economic growth.
For the first time since German unification, employment is on the rise. This
is a key prerequisite for strong domestic demand. The turnaround in employment
and falling import prices have benefited the purchasing power of households in
1998.
Concerns about a global credit crunch and recession have given rise to more
demands for a globally coordinated reduction in key interest rates. In our view,
the priority of the ECB is to complete the process of convergence of short-term
interest rates to a common level of 3.3% by the end of the year. The
interest-rate cuts required for this are still considerable in Ireland, Italy,
Portugal and Spain and represent a significant potential monetary stimulus for
Euroland. The Bundesbank is therefore not expected to lower its key rate this
year. We expect the ECB to ease in the first half of 1999. Such a move will be
dependent on the extent of the economic slowdown in Euroland, and a continuation
of the positive trend in inflation, along with the potential of further monetary
easing in the U.S.
2
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POLITICAL DEVELOPMENTS
For the first time since German unification, Germans have elected a new
Chancellor. The Social Democratic Party of Germany (SPD) and its coalition
partner, the Greens, have replaced the Christian Democrat-Liberal coalition. As
a result, we expect that next year's fiscal policy will be off to the best start
since German unification, although we are somewhat cautious because the
tax-reform measures approved by the new coalition are not as aggressive as had
been predicted. The reform merely lowers the tax rates in the current system but
reduces the availability of some tax exemptions. The focus of the reform is also
on a redistribution of income. The beneficiaries will be households with small
or average incomes. Despite a benign budget situation, only the third stage of
the tax reform scheduled for 2002 is to include a reduction in the net tax
burden by DM10 billion, according to the government's new plan. The first two
stages of the tax reform, which will involve cuts of DM14 and 16 billion in 1999
and 2000, respectively, are entirely financed through the abolition of tax
breaks. On balance, the tax reform will raise profits in the corporate sector,
but will diminish free cash flow.
PORTFOLIO REVIEW
In the third quarter of 1998, the total net asset value of the Fund returned
- -15.3% and the market price returned -18.8% compared to a return of -17.5% in
the DAX100 in dollar terms and -15.8% in the MSCI-Germany. For the first nine
months of the year, the total net asset value of the Fund has increased by
20.4%, compared with a rise of 12.6% in the DAX100 and 14.6% in the
MSCI-Germany.
In the course of the third quarter, the Fund lowered its weighting in the
banking sector by reducing its position in Deutsche Bank, Bayerische
Vereinsbank, BHF-Bank and Credito Italiano. The Fund also lowered its cyclical
exposure by reducing its position in Bayer, BASF, Daimler Benz and Lufthansa. On
the other hand, the Fund raised its weighting in the telecom, media and utility
sectors by increasing its position in Mannesmann and by acquiring a position in
EM.TV & Merchandising (EMTV) and Berliner Kraft und Licht. EMTV produces and
distributes children's television programs, licenses and merchandises its own
programming, as well as rights to third-party products, and promotes sporting
events, tradeshows and other large scale projects. Berliner Kraft und Licht
provides electricity and district heating to residential and business customers
in Berlin and its suburb.
At the end of the third quarter, the insurance sector represented the Fund's
highest sector weighting, and Allianz represented the largest single position in
the Fund.
3
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Stocks of the following companies represented the Fund's ten largest positions
at September 30, 1998:
<TABLE>
<CAPTION>
MARKET VALUE PERCENT OF
COMPANY IN USD NET ASSETS
- ----------------------------------------------------------------------------------- ---------------- -------------
<S> <C> <C>
Allianz AG Holding................................................................. $ 23,944,552 11.8%
Volkswagen AG...................................................................... 18,036,762 8.9%
SAP AG............................................................................. 15,896,300 7.9%
Mannesmann AG...................................................................... 13,649,264 6.8%
Munchener Ruckversicherungs-Gesellschaft AG........................................ 11,031,613 5.5%
Bayerische Vereinsbank AG.......................................................... 9,941,923 4.9%
Deutsche Pfandbrief- und Hypothekenbank AG......................................... 9,663,513 4.8%
Mobil Com.......................................................................... 9,226,557 4.6%
Daimler Benz....................................................................... 8,370,255 4.1%
Sixt AG Pfd........................................................................ 8,138,546 4.0%
---------------- ---
$ 127,899,285 63.3%
---------------- ---
---------------- ---
</TABLE>
PERCENT OF NET ASSETS BY INDUSTRY
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY CLASS NET ASSETS
- ----------------------------------------------------------------------------------------------------- -------------
<S> <C>
Automotive Related................................................................................... 13.1%
Banking.............................................................................................. 15.9%
Chemicals and Textiles............................................................................... 5.6%
Financial Services................................................................................... 2.2%
Household Related Non-Durables....................................................................... 5.8%
Industrial Equipment................................................................................. 5.6%
Insurance............................................................................................ 17.3%
Technology Services.................................................................................. 7.8%
Telecommunication.................................................................................... 12.7%
Telemedia/Services................................................................................... 2.5%
Transportation Services.............................................................................. 5.2%
Utilities............................................................................................ 1.2%
---
94.9%
---
---
</TABLE>
4
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THE EMERGING GERMANY FUND INC.
INVESTMENTS IN SECURITIES AND NET ASSETS
SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
SHARES EQUITY INVESTMENTS MARKET VALUE
- -------------------------------------------------------------------------------------------------
<C> <S> <C>
CONSUMER DURABLES SECTOR - 13.1%
AUTOMOTIVE RELATED - 13.1%
100,000 Daimler Benz AG **......................................................... $ 8,370,255
250,000 Volkswagen AG **........................................................... 18,036,762
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26,407,017
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CONSUMER NON-DURABLES SECTOR - 5.8%
HOUSEHOLD RELATED
NON-DURABLES - 5.8%
70,000 Adidas AG **............................................................... 8,025,985
1,750 Hugo Boss AG Pfd........................................................... 3,667,225
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11,693,210
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CYCLICAL/CAPITAL GOODS SECTOR - 16.4%
CHEMICALS AND TEXTILES - 5.6%
150,000 BASF AG.................................................................... 5,684,948
150,000 Bayer AG................................................................... 5,666,986
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11,351,934
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INDUSTRIAL EQUIPMENT - 5.6%
35,000 Aixtron AG................................................................. 5,553,227
129,993 Pfeiffer Vacuum Technology AG (ADR) *...................................... 5,759,479
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11,312,706
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TRANSPORTATION SERVICES - 5.2%
125,000 Lufthansa AG **............................................................ 2,470,513
59,100 Sixt AG Pfd................................................................ 8,138,546
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10,609,059
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INTEREST-SENSITIVE SECTOR - 36.6%
BANKING - 15.9%
135,000 Bayerische Vereinsbank AG.................................................. 9,941,923
150,000 BHF-Bank AG **............................................................. 4,849,719
251,500 Credito Italiano Sp.A...................................................... 1,047,917
100,000 Deutsche Bank AG........................................................... 5,167,046
134,500 Deutsche Pfandbrief- und Hypothekenbank AG................................. 9,663,513
7,500 UBS AG(Union Bank of Switzerland).......................................... 1,466,541
------------
32,136,659
------------
<CAPTION>
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SHARES EQUITY INVESTMENTS MARKET VALUE
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<C> <S> <C>
FINANCIAL SERVICES - 2.2%
1,300 MLP (Marschollek, Lautenschlager und Partner) Pfd.......................... $ 653,814
7,500 MLP (Marschollek, Lautenschlager und Partner) **........................... 3,772,003
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4,425,817
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INSURANCE - 17.3%
77,205 Allianz AG Holding......................................................... 23,944,552
25,000 Munchener Ruckversicherungs-Gesellschaft AG................................ 11,031,613
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34,976,165
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UTILITIES - 1.2%
50,000 Berliner Kraft und Licht................................................... 2,400,910
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MEDIA SECTOR - 2.5%
TELEMEDIA/SERVICES - 2.5%
15,000 EM.TV Merchandising........................................................ 4,984,433
------------
TECHNOLOGY SECTOR - 20.5%
TECHNOLOGY SERVICES - 7.8%
37,500 SAP AG..................................................................... 15,896,300
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TELECOMMUNICATION - 12.7%
49,700 Cseke Radiokomunikace *.................................................... 1,262,380
149,000 Mannesmann AG **........................................................... 13,649,264
37,133 MobilCom AG................................................................ 9,226,556
15,360 Teles AG *................................................................. 1,515,584
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25,653,784
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Total Equity Investments
(Cost $168,081,947) - 94.9%.............................................. 191,847,994
Other Assets Less Liabilities - 5.1%....................................... 10,356,244
------------
Net Assets - 100.0%........................................................ $202,204,238
------------
------------
</TABLE>
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Percentages are of net assets.
* Non-income producing security.
** Part of this security is on loan.
5
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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
Robert J. Goldstein, Secretary
Karin L. Brotman, Assistant Secretary
Caroline M. Hirst, Treasurer and Assistant Secretary
Judith W. O'Connell, Assistant Treasurer
Jennie W. Klein, Assistant Treasurer
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INVESTMENT ADVISER AND MANAGER
Dresdner RCM Global Investors LLC
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
PricewaterhouseCoopers LLP
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 or visit the Fund's website at www.emerginggermany.com.
DIVIDEND REINVESTMENT PLAN
Through the Fund's Voluntary Dividend Reinvestment Plan (the "Plan"),
shareholders may elect to receive dividends and other distributions in the form
of additional shares of the Fund. As of November 29, 1998, shareholders who hold
Fund shares in their own name will automatically receive dividends and other
distributions in the form of additional shares of the Fund. Other shareholders
wishing to participate in the Plan should contact their brokerage firm, bank or
other nominee to see if it will participate on their behalf. 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
SEPTEMBER 30, 1998
