Croatia is likely to remain off emerging market fund managers' radar screens in the short term, alth...
Croatia is likely to remain off emerging market fund managers' radar screens in the short term, although long term forecasts show the market is set to become increasingly attractive.
Leila Kardouche, fund manager at Schroders, says the election of the new coalition government in January, and appointment of Stipe Mesic, from the small centrist Croatian People's Party, as president, was a major positive for the market. In her eyes the change in government has heralded the end of nationalism and the start of rapid integration with the European community.
However, Croatia is still not a formal candidate for EU membership as politics remain a stumbling block to accession. Peter Grace, investment manager at Gartmore, says Croatia's long-term prospects are more attractive than they have for a long time, as the country distances itself from the Tudjman era and looks to the EU for its future.
He says the country took the first steps last December when the new president was elected and subsequent parliamentary elections brought in a reform-minded government.
Prime Minister Ivica Racan says his government's emphasis is on improving the economy and it is considering tax cuts, privatisations and other measures. He is also believed to be in negotiations to agree to the dismantling of some of president's constitutional powers.
Kardouche says improving the economy will not be a short-term process.
Although per capita income is high, largely a function of private enterprise and ties with the EU in the 1970s and 1980s, the economy has suffered many setbacks. She adds: "Croatia suffers from current account problems, largely to do with the fact that exports and growth have been weak due to a strong currency policy introduced in the mid-1990s. Going forward, the external situation should improve, particularly as tourism receipts start to pick up after the conflict. Last year's sale of the Croatian telecoms company, followed by an IPO later in 2000 should also turn sentiment."
One of two stocks which dominate the Croatian market are Zagrebacka Banka, in which German insurer Allianz has recently taken an interest.
The other is Pliva, a pharmaceutical whose blockbuster anaesthetic Azithromycin, Pfizer markets under license in the US. This product, midway through its patent lifecycle, is shortly to be marketed in Japan.
Kardouche says: "From an equity perspective, Croatia is not yet exciting. However, because of the encouraging political changes which should translate into positive economic developments, it will enter emerging market portfolios. This will be aided by Croatia's acceptance into a mainstream index and the addition of larger, more liquid stocks."
Grace adds: "The fact that Croatia is not included in any index means it can be an unpredictable market, with lower correlation to main markets and not always reacting to fundamental news immediately. Although macro and micro criteria are looking better for the longer-term, we do not see a significant short-term impact."
Increased tourism should also have a short-term positive impact on Croatia's economy.
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