Although Central and Eastern European markets have failed to perform as well as their US or Western ...
Although Central and Eastern European markets have failed to perform as well as their US or Western European counterparts in recent months, emerging European equities are still believed to be undervalued.
The main reason for this is that convergence ' entry to the European Union (EU) ' looks to offer potential gains for investors in these countries.
Klaus Bockstaller, manager of the Baring Emerging Europe fund, anticipates EU accession will boost converging European economies in the same way as happened with Ireland, Greece, Spain and Portugal when they joined up.
'Inflation and interest rates have fallen and, going forward, we expect to see more foreign direct investment, encouraged by the region's low wages, low taxes and undervalued currencies.'
Bockstaller believes the fundamental story is strong and expects convergence to continue to be a successful investment theme. 'Of the 10 new countries set to join, Hungary, the Czech Republic and Poland have already affirmed their commitment by voting decisively in favour of accession,' he says.
All three markets have performed well in the year to 25 August, with the Hungarian Budapest Stock Exchange rallying from 8000 to 8700, the Prague Stock Exchange Index from 460 to 620 and the WSE Wig Index from 14,000 to 21,000.
'Realistically, the first wave of new countries should join the EU in 2004, enter the Exchange Rate Mechanism two years later and adopt the euro currency from 2007 and 2008,' says Bockstaller.
As a result, he adds, currencies will effectively be linked to the euro, which should lead to them appreciating in the intervening period. 'Gross domestic product levels in Central and Eastern Europe continue to increase as exports hold up and domestic demand rises,' Bockstaller notes.
'Labour costs and tax rates remain comparatively low, encouraging international companies to outsource operations to the region. In addition, falling interest rates are fuelling consumer spending and borrowing. For example, mortgages were non-existent in Hungary a few years ago and are now growing at a rate of more than 20% a year.'
Bockstaller is also expecting strong economic growth in Russia. 'It has come a long way in its transformation into a free market economy, while its economic and political stability has attracted foreign domestic investment,' he says.
Neil Gregson, manager of the Credit Suisse European Frontiers, stresses that Russia has again been one of the strongest emerging markets.
Over the year to 25 August, the MSCI Russia Index has rallied from around 270 to 410, with the top performers including Unified Energy, Mosenergo and Norilsk.
'The macroeconomic situation in Russia remains strong with improving fundamentals,' says Gregson. 'GDP growth in the first half of 2003 was above 7%, wild currency volatility is a thing of the past and debt servicing is no longer a problem as foreign exchange reserves are now more than $60bn.'
Gregson points out more investors are choosing to invest locally while direct investment by multinational companies has been increasing.
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