The prospects of future EU membership keep fund managers attention firmly focused on Turkey, Hungary...
The prospects of future EU membership keep fund managers attention firmly focused on Turkey, Hungary and Poland. As ever with emerging markets the future is not without its problems. The threat to economic reforms from Turkey's continuing political instability and Poland's current account deficit and limited ability to tap into European growth are considered negatives.
Consensus among emerging markets analysts is that projections for healthy European growth will drive GDP growth of around 5% in Hungary, and 4% in Turkey and Poland. Yet Hungary's stable political climate, healthy macro-economic position, reasonable valuations and quality companies make it the most attractive to foreign investment.
Fund manager Andrew Elder, of Aberdeen Asset Management, favours Hungary and Turkey ahead of Poland, which is experiencing upward pressure on interest rates and no prospect of downward movement in inflation. He says: "Hungary has a pretty stable macro-economic environment. Inflation is at 8.8% and is dropping, the current account is not out of control, government is pursuing EU-friendly policies, there are solid flows of direct foreign investment, valuations are fairly reasonable and there is a continuing policy of deregulating business."
He says promising stocks include Matav, the fixed line telecoms company which has a 100% stake in mobile operator Panon and trades at nine times the enterprise value to earnings multiple. Another stock is OTP, the biggest bank in Hungary, which has a price to book multiple of 2.5.
Turkey, although suffering much higher inflation, has put a programme of disinflationary reforms into place. These could be derailed if political instability continues. The plans, which has received the blessing of the IMF, involve moves to deregulate the economy, tighten government spending and continue the measured depreciation of the Turkish lira to avoid importing inflation while putting pressure on employers to keep wages down.
The most attractive stocks, according to Elder, are the mobile operator Turkcell and Medya Holding, which invests in traditional media, but is also developing its internet business.
He says: "We are marginally positive on Poland but are concerned that domestic consumer demand is so strong it is sucking in too many imports. The current account deficit is between 7% and 8%, which is bad for the currency, and the interest rates are unlikely to fall from their current rates of 15% as forecasters had been expecting."
Helen Taylor, European, Middle East and Africa fund manager at Royal & SunAlliance, says valuations in Hungary remain more attractive than in Poland, which has seen internet stocks leading the way.
She stresses that if European growth did not occur as expected, Poland stood exposed to inflationary pressures due to a 7% current account deficit. She says: "The P/E ratio in Hungary is around 18 times, compared to 24 times in Poland, and I don't see why we should pay more for Poland when there are current account concerns."
She says the Turkish government has indicated it is committed to the ongoing process of economic reforms, and also recognises the reforms might represent the country's last chance to meet EU inclusion criteria. Although the targets for disinflation are ambitious, indicators had already begun to show some effect, she adds.
In terms of stock choices, she is unhappy with the quality of Polish internet firms that have been attracting foreign investors but says a potential bidding war for Telecom Polska, the monopoly fixed line operator, could see its share price rise. In Hungary she tips Gedeon Richter pharmaceuticals for success. In Turkey she thinks consumer-driven sector stocks will be boosted as interest rates drop.
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