Performance in the Eastern European region has been weak over the past year, with the MSCI Eastern E...
Performance in the Eastern European region has been weak over the past year, with the MSCI Eastern European Index down 10.88% in dollar terms over the year to 10 August.
Charles Heenan, portfolio manager at First State Investments, says: 'A combination of weakness in the region, slowing growth and problems of corporate governance, all mean people are not willing to invest in the region at present.'
Heenan says companies in Eastern Europe still do not look after minority shareholders, which are often taken advantage of. He says the laws are slowly being tightened up and examined but remain a turn-off for investing in the region.
Financials are still the sector of choice in Poland, Hungary and the Czech Republic as they ready themselves for convergence into the EU, according to Andrew Elder, manager of the Aberdeen Frontiers fund.
Elder says he prefers this sector on a long-term convergence story as all three countries prepare themselves to enter the EU in early 2005. He believes the changes the economies have to go through to be accepted in the EU, such as privatisation and re-structuring to get them in line with the Western free market, will benefit their economies.
He adds that there has been a lot of corporate activity in the financial sectors of these countries ' Polish bank Peko was bought by the Italian bank Unicreditor, for example, and Czech bank Komercini was recently bought by the French bank SociÃ©tÃ© GÃ©nÃ©rale.
Hungarian pharmaceuticals have also been strong as a sector, according to Heenan, with Gedeon Richter and Egis two of the strongest performers in the region. In its second-quarter report, he says, sales growth for Gedeon exceeded all market expectations by at least 20%, driven by 45% export sales growth in Russia.
Year to 14 August 2001, Egis is up 10.24% in dollar terms while Gedeon has risen by 2.81% over the same time period.
Heenan says it has been difficult to find quality companies in Eastern Europe, such as those that demonstrate strong experienced management, strong barriers to entry and honest and proper treatment of foreign shareholders.
However, he believes Gedeon has strong management, is trustworthy, entrepreneurial and has a strong distribution in Russia, as yet a fairly untapped area, so it is in a good position.
Heenan says telecoms still remain the weakest sector in the region. TPSA is down some 55% in US dollar terms over the year to 14 August 2001, while Netia, a small telecom operator in Poland, is down more than 90% over the same period. Elder says although telecoms are becoming more attractive than they were, he does not see any catalyst for re-ratings in the sector and so remains negative on them.
Steve Bates, head of the emerging markets desk at JP Morgan Fleming Asset Management, says three stories dominated the Eastern European markets in July: the slowdown of the US economy, the debt crisis in Argentina and Turkey with its potential contagion towards other emerging markets, and a weakening of the oil price combined with the subsequent actions taken by Opec.
• Hungarian pharmas performing well.
• Three countries to enter EU in 2005.
• Low inflation/strong exports aided Hungary.
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