Short-term considerations frequently dominate an investment manager's life, but investment in emergin...
Some countries are destined to outperform others by dint of their low cost base relative to their skill level and geographic location. Along the way they may have the odd bump but - good government permitting - they will put in better performances than others.
The countries now converging with the European Union are on this list and the risk of bumps is lower than others due to their geographic proximity and the ever growing investment ties with their richer neighbours. Two countries that stand out in this group are Hungary and Poland.
Both have demonstrated several years of well above average growth and political stability. Of the two, Hungary, with a smaller population and a greater proportion of its GDP being dependant on exports to the EU, is more likely to relate to the EU's performance than Poland, which as a larger country is driven to a greater extent by internal demand.
Hungary is politically stable, having had three elections this decade all of which elected moderate governments. The political risk is extremely low. Moody's has just raised its credit rating again, endorsing the monetary policies the Central Bank has followed.
Hungary grew at over 5% last year, the fastest of any of the Central European countries. This is likely to drop to 3.5% in 1999 due to a slower German economy, its chief export market. As the latters' economy now shows signs of resuming growth Hungary's growth rate should resume a faster track in 2000.
While the timing of EU accession is uncertain - with the range of predictions being from 2002 to the second half of the decade - Hungary already enjoys tariff free trade with the EU in nearly all areas. As long as political footballs such as agricultural products are avoided, the country can almost already be regarded as an EU member for trade purposes.
The example set by countries such as Ireland, which joined the EU with a low cost base
but a well-educated workforce, auger well for the next decade.
After more than 10 years of managing the $200 million First Hungary Fund in Hungary we have developed several fundamental requirements governing our investment philosophy. A lot of these are negative, such as avoiding political footballs. However, a basic need for companies in a trading country such as Hungary is that those exploiting the relative advantages of the country are likely to do better than others.
While there are bedrock 'buy the economy' stocks in any country, such as Matay, the Hungarian Telephone Company, others using Hungary's relatively low cost but well-educated scientists, engineers and skilled labour are likely to outperform the averages if well managed.
North American Bus Industries, for example has gone from nowhere to a 15% share of the US bus market in five years. It is now exploiting its technological capabilities in alliance with others to produce revolutionary new products such as a bus made out of composites which is 30% lighter than conventional buses.
A second area of traditional strength is pharmaceuticals. Hungary has a long tradition of expertise in this area going back to the last century. While obviously not having the resources of the large multi-national drug giants, a number of companies in the country are exploiting low-cost scientific expertise for drug development. IT is also making significant progress in Hungary.
The high level of mathematical skills and the brain power that produced the Rubik's Cube provide the raw material for imaginative software companies, two of which, Graphisoft and Synergon, have successfully gone public.
Michael Carter is managing director of
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