President Clinton's swing through Eastern Europe drew attention to a region whose economies and stock markets have quietly been percolating.
Indeed, as Poland's economy revived last year, its fledgling stock market surged by more than 730% in U.S. dollar terms, making it the top-performing market in the world last year. The Warsaw exchange continued its ascent in the first half of January - despite the fact that Eastern European nations were disappointed in their attempts to gain membership into the North Atlantic Treaty Organization.
The markets of Poland, the Czech Republic, Hungary and Slovakia - known as the Visegrad Four, after the Hungarian town where these nations formed their group in 1991 - are expected to continue to attract international attention and become more important players in the emerging markets arena, especially if they can gain entrance into the European Union, which would boost exports.
Prospects for 1994 for the Warsaw, Prague and Budapest markets are strong, emerging markets experts said. Stock prices will be buoyed by "continued interest from domestic and foreign investors, and economic growth. There will be large sums of money chasing a limited number of stocks," said Jonathan Passmore, director of marketing at Creditanstalt International Advisors Inc., New York.
The wild card, of course, is whether the right-wing forces in Russia will derail that country's market reforms. "The big bogeyman in the background is what happens in Russia. That's likely to keep somewhat of a lid on people's expectations," said Steven Bates, director, Fleming Investment Management Ltd., London.
Other deterrents exist. The relatively small number of tradable stocks and lack of liquidity means investors should be wary.
Said Peter Jeffreys, managing director of Fund Research Ltd., London: "Anyone who goes into them has to approach it from a very, very long time horizon."
Echoed Adam Spector, director, international investments group, SEI Corp., Wayne, Pa.: "Investors can think about beginning to get exposure to Eastern Europe, but only the hearty will want to venture there now."
Still, Poland's market surge last year has helped stir interest in the whole region's markets. "I'm sure within the next 18 months, we will be in Poland, the Czech Republic and Hungary," said John F.H. Trott, executive vice president, Bessemer Trust Co., London.
Even managers who now find the Eastern European markets pricey on a fundamental basis think the future is promising.
In 1994, "the supply (of stock) will increase, liquidity will improve, and for these reasons, the scarcity premium that has been attached to these stocks' prices will disappear gradually," said Dobrinka Cidrof-Kazgan, analyst with Emerging Markets Management, Arlington, Va.
Because growth prospects are strong, that firm has upped its Eastern European allocation to 5% from only 1% to 2% a year ago.
Fundamentals are promising for the long term. Pent-up consumer demand, the need for infrastructure improvements, labor costs about one-tenth of those in the former West Germany and a high degree of skilled labor make those countries' stocks alluring, said Reiner Triltsch, a principal with Gulfstream Global Investors Ltd., Dallas.
Stock-market prospects vary, of course. Here's the outlook.
Poland's 4% growth rate last year made it the fastest growing economy in Europe, and investors rushed in, causing price-to-earnings multiples to soar to 25 from 2.
Prospects for the economy sailing along at 4% or better likely means another strong year for the stock market, although nothing like the meteoric rise of 1993.
With 60% of Poland's economic activity now generated by the private sector, that growth rate "could easily climb to 5% to 8% for the (following) five years" if Western Europe drops protectionist barriers or Eastern European countries adopt tight fiscal policies, said Dirk Damrau, director in emerging markets research for Salomon Brothers Inc., New York.
Still, the market's lofty levels suggest a correction is due, several observers said.
Poles are invested heavily in their own market, unlike in Hungary and the Czech Republic. With few other investment alternatives available, they are unlikely to move their money elsewhere. And a long-anticipated mass privatization of state assets - some 600 companies - finally may occur in the next year or two, providing a valuable new source of stocks.
Even the election of a socialist regime last year has not deterred moves toward a market economy. While the pace of reform has slowed a bit, the Polish government still wants to refinance Poland's external debt, and has reaffirmed the privatization program and the general structure of the free-market economy, said David Tripple, chief investment officer of Pioneer Mutual Funds, Boston, which runs an open-ended fund for Polish citizens.
Polish stocks recommended by Mr. Passmore of Creditanstalt International Advisors are: BRE Bank; Elektrim, a diversified company in such areas as engineering and construction and financial services; Prochnik, a garment manufacturer; Wedel, a confectionery company in which Pepsi has the majority ownership; and Zywiec, a brewery.
While Poland's stock market was last year's stellar performer, some experts think the Prague Stock Exchange offers the best long-term promise.
A mass privatization of 930 companies in late 1992 and early 1993 enabled the exchange to open its doors in June. Czech citizens were permitted to exchange vouchers for shares in companies or for interests in investment companies. More than 400 investment companies resulted, and they own 70% of Czech stocks, CAIA's Mr. Passmore said.
A second round of privatizations, involving another 700 companies, should come to the exchange in late 1994 or early 1995, making the Prague market the largest in Eastern Europe. "But how many of these companies will be of interest to international investors remains to be seen since not a lot of information is available about Czech companies so far," he added.
Nevertheless, the long-term outlook for Czech stocks is strong. John Legatt, emerging market portfolio manager, G.T. Management, London, said the nation "has a strong government committed to reforms, and the Czechs are well-educated, particularly in engineering."
In addition, the country has reoriented trading patterns toward Western Europe, is more stable politically than Poland, has relatively low inflation and unemployment, and enjoys a budget surplus, Mr. Triltsch said.
Stocks cited by several investors include Ceske Energeticke Zavody, the state electric power generation company with a $3.5 billion stock-market capitalization, and Cokoladovny Praha, with a 70% market share of the confectionery business.
Given its 25-year experience of economic reform, many observers once expected Hungary to take the lead in Eastern Europe. But the country has been surprisingly slow to get off the dime.
Privatizations have moved at a slow pace. Meanwhile, the agricultural sector has been hit with drought and confusion following the breakup of collective farms. Government debt-to-GDP ratio also is around 60%, considerably higher than other Eastern European states. And an election later this year may cause a shift toward the right.
In addition, Hungarian companies are more likely to seek debt financing than raise capital through the stock market. A switch to registered shares from bearer shares in one stock made the market appear stronger than it might have been, noted Julian Cooke, investment manager at John Govett & Co. Ltd., London, which runs the Hungarian Investment Company Ltd. Strong institutional investor interest, aided by special tax breaks to Hungarian companies, drove returns up, he added.
Still, many fund managers view Hungary favorably, citing its stable democracy, rebounding economy and the relatively low p/e of its stock market. Oft-cited stocks include Pick, a salami maker, and Zwack Unicum, a liquor distiller.
More closely tied to the former Soviet Union, to which it was an armaments supplier, Slovakia still is experiencing a recession and has less to offer to the West than its former half in the Czech Republic.
A privatization of 500 companies enabled the opening of the Bratislava exchange in October 1993, but there's very little trading.