managers are starting to focus on Czech republic, hungary and russia but not poland
Funds investing in Eastern Europe are increasing weightings in Hungary, the Czech Republic and Russia, according to research by Forsyth Partners.
Companies in the three have been restructuring and the macroeconomic conditions have been improving. Meanwhile, fund managers have reduced their weightings in Poland where interest rates and unemployment remain high.
The CA-Funds Eastern Europe, managed by Benoit Parisot and Nicolas Picard, is overweight in Hungary and the Czech Republic.
Parisot said these positions are a result of CrÃ©dit Agricole's stock-picking approach.
According to Parisot, banks offer attractive opportunities in both the Czech Republic and Hungary, as they move to cut costs and as profits start to rise.
In addition, the banking sector has been targeted by Western companies for mergers and acquisitions. In Hungary, the Socialist Party victory is also set to be good for the stock exchange, said Parisot. This is because the party has announced it will boost trading in stocks by abolishing capital gains tax and speeding state asset sales, primarily by selling shares to small investors.
The Lombard Odier Eastern Europe fund is overweight Russia. The fund, which uses both a top-down and bottom-up stock-picking approach, is managed by Coast Sullenger.
He said in Russia the macroeconomic backdrop is positive and there is political cohesion in the country. The reform meas- ures introduced by the government has created sustainable growth for the country and GDP is around 5%. According to Sullenger, there has been a rebound in the local market. The export component of GDP has gone down from being 40% in 2000 to 33% in 2001 which implies local industries have been increasing their output.
Sullenger is overweight in the manufacturing sectors in which companies have growing revenues and increasing export links to China. CrÃ©dit Agricole has a different view of Russia. The CA-Funds Eastern Europe portfolio position has been reduced to neutral. Parisot said the market now has less potential as valuations are looking stretched. Although the strong oil price and the government reform process has created a boom in the market, Parisot is unsure as to how much further the market will go up.
The CA-Funds Eastern Europe has also reduced its weighting in Poland. Lombard Odier also has an underweight position in Poland. Sullenger said economic growth has been low at around 1% and that the country needs to grow in preparation for its convergence with the EU.
There is political resistance to the reform processes needed to enter into the EU including cutting back on government subsidies for the agricultural sector. Unemployment and interest rates also remain high.
One area that has been performing well in Poland is banks, however. Interest rates are expected to come down and Polish banks have been targeted by European financial institutions for merger and acquisition. In addition, banks are cheap on fundamental valuations, he said.
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