With a strong start to the year in many Eastern European markets, fund managers are fairly bullish on...
Hungary in particular has seen its stock market reach record highs in early-2000, with the BUX Index at 9858.10 on 17 January.
Robin Geffen, manager of the Orbitex Eastern Europe fund, is particularly keen on markets aiming to enter the EU.
He says: "Our favourite among the larger markets in this category is Hungary. Interest rates are coming down, with two cuts already this year bringing rates down from 14.25% at the end of 1999 to 12.25%.
"In addition, inflation is coming down from around 10% in 1999 to an estimated 8.3% in 2000. We predict GDP growth for 2000 of around 4.6%, which might prove to be a conservative estimate."
Strongly-performing stocks have included telecom Matav, whose external shareholders include MCI Worldcom and Deutsche Telekom, and pharmaceuticals Gideon Richter and Egis.
Geffen remarks: "Of the pharmaceuticals we prefer Gideon Richter, which is three times larger and which provides clear and transparent information. A substantial stake in Egis is privately owned and, as a result, the quality of disclosure is poor.
Additionally Richter, like a number of other Hungarian companies, has a dominant position in the region, another example being the oil company MOL.
"A particular favourite of ours is petrochemical manufacturer Borsodchem, which is held partly as a proxy EU recovery play. Half the company's sales are in the EU and this is the lowest-cost petrochemical company in the EU."
Geffen is also positive on smaller markets that look set to benefit from EU expansion.
"Against our peer group we are substantially overweight Slovenia, Estonia and Croatia. With the prospects of eventual EU entry looking ever more likely, cashflows into these countries are creating some useful rises in the good stocks."
Douglas Helfer, fund manager at Foreign & Colonial Emerging Markets, also believes EU convergence is a positive trend in the region, although he believes the main re-rating is yet to come.
He says: "The real convergence activity of rapidly falling interest rates and rises in equities is still some way off. Hungary is not likely to join until 2003-2004 and it is still too early to price in this type of re-rating.
"However, the likelihood of convergence is raising the profile of companies in countries likely to join and bringing them to the attention of mainstream pan-European investors."
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