Further reforms and liberalisation in Central European countries joining the EU is expected to add 1...
Further reforms and liberalisation in Central European countries joining the EU is expected to add 1% per year to their economic growth rates.
Of the 10 Central and Eastern European countries set to join the EU, Hungary, the Czech republic and Poland have already affirmed their commitment by voting decisively in favour of accession. The first wave of new members are scheduled to join the EU in 2004, enter the Exchange Rate Mechanism in 2006 and adopt the euro between 2007 and 2008.
Klaus Bockstaller, fund manager at Baring Asset Management, says these countries will enjoy accelerated growth from 2004, driven by increased capital flows. Over the next five years he anticipates the new members will benefit from around £70bn of EU investment to bring infrastructure and services standards, such as transport, healthcare and information technology, into line with existing member states.
Although the convergence theme remains attractive, Bockstaller stresses it is underpinned by strong fundamentals, which should provide for superior returns than investments in Western Europe over the medium- to long-term.
'Inflation and interest rates have fallen and going forward we expect to see more foreign direct investment (FDI), encouraged by the region's low wages, low taxes and undervalued currencies,' Bockstaller notes.
'While convergence has and will continue to be a successful investment theme, the fundamental story is also strong. Central and Eastern Europe is a great place to find companies with strong cashflows and high dividends.'
He adds their currencies will be linked to the euro in the interim and so should appreciate.
Neil Gregson, manager of the Credit Suisse European Frontiers fund, says Russia is benefiting from similar improvements in fundamentals, although driven by FDI rather than EU convergence.
Nonetheless, corporate governance issues, combined with political intrigues relating to the non-transparent ownership of oil giants Yukos and Sibneft, conspired to drag the market down by 10% in the month to 22 July.
Yukos fell by 18% after its offices were raided by armed guards as part of a tax investigation. Gregson says the trouble started when Platon Lebedev, chairman of Menatep group, which owns 61% of Yukos shares, was recently arrested for his role in the 1994 acquisition of a fertilizer plant during the country's massive flight to privatisation.
Yukos chief executive Mikhail Khodorovsky incurred the wrath of Putin by lobbying local parliamentary members and backing opposition parties ahead of government elections in December, Gregson added.
This has raised questions about how the merger will proceed and cast doubt over anticipated progress of Yukos' proposed restructuring programme. Gregson has held the stock for nearly two years but will tender his share in Yukos' current share buyback programme.
'Developments in the Yukos case will be keenly watched by the market. However, we believe the past two weeks will represent the worst of the election period in terms of market impact,' Gregson adds.
Further reforms should boost growth rate.
Firms at a discount to Western counterparts.
Convergence theme remains strong.
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