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December 11, 2000 12:00 AM

CENTRAL EUROPE: EU membership could boost equities

Markets in Poland, Czech Republic and Hungary likely to see substantial gains on the basis of expectations that they'll join up

Beatrix Payne
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    LONDON -- Now might be the time to invest in central Europe again.

    Back in the mid-1990s, Poland, the Czech Republic and Hungary were the darlings of emerging markets.

    But investor sentiment toward these countries took a severe knock in mid-1998 as the emerging markets crisis was exacerbated by Russia's debt default.

    With these three economies now expected to join the European Union within at most 10 years, however, their investment markets and stock prices could triple in the next three years, according to Stephen Wood, head of Central European equities at Groupama Asset Management GB, London.

    "It's easy to see a four- to six-times increase in values from where we are today. ... This is the time investors should be bottom fishing" for cheap stocks, he said.

    Back in early 1998, stock prices in Poland, the Czech Republic and Hungary had factored in the benefits of these countries' expected membership in the European Union. This so called convergence factor accounted for about one-quarter to one-third of stock prices at that time. But after the dive stock prices took following the financial crisis of 1998, and Mr. Wood now believes the convergence factor accounts for around 10% of the stock prices in the region. He is certain the only way is up.

    Spanish stock prices surged shortly before and for some time after Spain joined the European Union in 1986. Asset values at least tripled after Spain joined the union, he said.

    Price rise expected

    As these central European economies prepare to meet the criteria for joining the EU, inflation and interest rates will fall to European Union levels and on that basis alone stock prices should rise.

    But Helene Williamson, director of fixed income at Foreign & Colonial Emerging Markets Ltd., London, is skeptical about the impact of these three economies on the European Union and is concerned their early entry could trigger further weakness in the euro.

    She also believes EU convergence already has been priced in and that investors stand to make better gains in other emerging economies.

    "Most of the juice in central Europe has gone," Ms. Williamson said. She warned that until the Czech banking system has been reformed there would be limited opportunities in that market.

    Timing unclear

    But the jury is still out as to when these three economies will join the EU. If the euro remains weak, it won't be until some time after 2003, said Ms. Williamson. Other market observers say 2003 is optimistic, and it might not happen until as late as 2006.

    Hungary, which recently had its sovereign debt rating upgraded by Moody's Investor Services, is expected to join the EU in 2004.

    Mr. Wood said the number of private equity funds focused on central Europe has grown rapidly over the last nine months and investment flows from U.S. investors into these funds are starting to increase.

    "At the moment there is not a lot of new money on the ground but a lot is being raised, and several billion dollars' worth will be invested over the next six to 12 months," he said.

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