IFAs should reassess the investment potential of Eastern Europe as as an asset class, suggests JP Morgan Fleming, as those countries joining the European Union on 1st May appear to have healthier economies than Western Europe.
According to JPMF, the outlook for Eastern Europe is positive at least for the next couple of years once they enter the Eurozone in two weeks time, as Eastern European countries are still seeing a rapid improvement in their macro-economic conditions in order to meet EU entry and are expected to continue to benefit once the date passes.
In particular, the end of trade barriers and greater potential for privatisation and shareholder value is expected to significantly benefit companies in countries such as Poland, as labour and manufacturing work is now shifting from countries such as Spain – in the case of car manufacturer SEAT – to Slovakia.
Any companies which come onto the stock markets now in Eastern Europe are likely to seem a better investment than many Western European stocks, says JPMF, as earnings growth is potentially stronger and share values come in at a cheaper price.
European stock markets are stabilizing in former Cold War countries as a result of the confidence surrounding EU accession, making it a safer bet European markets will present decent returns and lower volatility than companies of other emerging market economies, says Mark Robinson, JPMF New Europe fund manager.
“European convergence on the 1st May presents an exciting equity investment opportunity because currently low equity valuations of the region are accompanied by strong earnings momentum, and investors are starting to recognise the potential in these markets,” says Robinson.
“Economic growth prospects for this year within the key accession markets of Poland, Czech Republic and Hungary are estimated to be higher on average than in Western European markets.
"As experienced by Spain, Portugal and Greece in their accession to the EU, this process of convergence should result in accelerating economic growth and productivity gains within the new entrants as the catch-up affect occurs and, ultimately, recognition of these conditions by equity investors in appreciating stock markets. This is likely to be maintained at least until their adoption of the euro towards the end of the decade," adds Robinson.IFAonline
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