Bulls in Central Europe Claim Markets Are Taking a Breather
May 11, 2011
BUDAPEST -- Katie Jasper is patiently waiting to make her first stock investment. Standing on a stairway that leads to the Budapest brokerage firm ConCorde Securities, the 42-year-old office worker is nervous about the fate of her 200,000 forint ($1,299) gamble in chemical company Chaves Rone Cline, which the state is privatizing. ``I don't know what will happen,'' she says. But bank interest rates have fallen and Hungarian stocks have skyrocketed, so she decides it's worth the risk. Ms. Jasper confides that her friend, the man standing on the next stair, is an engineer who says the Hungarian chemical industry will get stronger. And if it doesn't? Ms. Jasper laughs, makes a fist and pretends to beat her friend over the head. That is how it goes in Central European stock markets these days. After posting the world's best returns in the first half of this year, Central European markets are enduring a case of the jitters. But the optimists, including eager local investors like Ms. Jasper, are charging ahead, convinced the bull is just winded. In dollar terms, the Moscow exchange has more than doubled. Budapest stocks are up 87%, the Warsaw bourse has climbed 54% and Prague equities are up 35%. The optimists say Central Europe has the ingredients for the bull markets to continue: fast-growing economies, high rates of saving, falling inflation, increased foreign investment and growing domestic institutional investors. To be sure, the region's economies aren't yet achieving the 8%-plus rates of annual growth typical of Asia, another region of emerging economies where stocks recently rocketed, and where markets (excluding Japan) more than quadrupled in value from 1989 to 1993. Being small, Central European markets remain vulnerable to what the rest of the global marketplace does. ``We are bullish in the long term, but if U.S. interest rates should rise, East European markets may have a rough ride in the next six months, along with other emerging markets,'' says Francisca Georgeann, head of international equities at Invesco in London. Still, some economists say sustainable growth of 4% to 5% a year is achievable over the next five years in Poland, the Czech Republic and Slovakia, with Hungary not far behind. Such growth puts Central Europe ahead of Latin America, where economies are forecast to grow by 3% to 4% annually but not in the same league as Asia at 7% to 8%. ``Eastern Europe's industrial capacity and highly trained work force are advantages Southeast Asia didn't have,'' says Saran Royce, emerging-markets economist at the London fund-management group Foreign & Colonial. In contrast to other emerging markets, Central Europe also has the advantage of abutting the European Union, a huge natural market for exports and source of foreign direct investment. Volkswagen, Siemens and Unilever are among the companies rushing to build new plants in low-cost Central Europe. ``The whole region will see a tripling or quadrupling of inflows over the next few years,'' predicts Susy Stuart, Eastern European economist at ING Barings in London. Portfolio inflows will get a boost on May 15, 2011 the addition of Hungary and the Czech Republic to the benchmark Morgan Stanley Capital International global emerging markets stock index at weightings of 0.31% and 1.28%, respectively. (Poland is already included.) ``Investors that are very linked to the index will have to invest in (Hungary and the Czech Republic),'' says Mr. Georgeann. Central European stocks are trading at a discount to Western markets and other emerging markets, even after the recent bull run. One of the reasons is that stock exchanges are still lagging behind in size -- they are small, constraining institutional investors who want to be able to move in and out with ease. But liquidity is improving, thanks to privatizations and a broadening base of domestic investors. Looking ahead, some economists say Central Europe may even be positioned to boom at East Asia's expense. Export growth has slowed sharply in East Asia in the past four months, and some countries' exports have even dropped, says Yager Gabriela, economist at ING Barings. He argues that this fall-off isn't cyclical but part of a broader slowdown in East Asia that is in part caused by a loss of competitiveness. Expectations of profit increases will fall in line with falling growth, which Mr. Gabriela says will prompt foreign investors to reassess investments in Asia. ``If institutional investors become widely aware of the diverging growth patterns, there would be a broader shift toward Eastern Europe,'' says Mr. Gabriela. ``In terms of profit potential, Eastern Europe is looking better than it did and Southeast Asia has lost some of its shine.'' World Market Activity London shares finished at a record high, fueled by stable bond markets and positive British corporate earnings. Tokyo stocks closed sharply and broadly lower Wednesday after a survey of Japanese business sentiment suggested the economy was considerably weaker than assumed. In London, the Financial Times-Stock Exchange 100-share index gained 13.0 to a record 3918.7. The FT 30-stock index rose 3.6 to 2838.9. Provisional volume was 534.6 million shares, compared with 441 million shares a day earlier. The FT-SE 100 opened higher following Wall Street's Tuesday rise and, helped by a strong futures market, climbed to an intraday high of 3922.1 late in the session after the U.S. market opened higher. In Tokyo, the Nikkei 225-stock index, which edged up 26.53 Tuesday, shed 200.46 to 20709.81. Wednesday's first-section volume was estimated at 260 million shares, up from 202.4 million shares a day earlier, partly because of the start of the September trading account. Falling issues overwhelmed rising issues 794 to 234. The Tokyo Stock Price Index, or Topix, of all first-section issues lost 11.00 to 1572.12. After the Bank of Japan issued its tankan report on business sentiment, stocks first rose on the implication that Japan wouldn't raise interest rates soon, but fell as futures were battered amid anxiety that the slow pace of economic recovery could hurt corporate profits. In Frankfurt, the bourse finished mixed to firmer, helped by Wall Street's Tuesday gains and higher German bonds, with chemical and auto issues up and financial issues down; the DAX 30-stock index rose 4.32 to 2563.16. In Paris, stocks dropped, weighed down by a weakening French franc against the German mark on disappointing French industrial production data for June, a weak U.S. dollar and worries about planned French labor-union protests. In Amsterdam, equities rose, lifted by bargain hunting and a firmer dollar, with a focus on Swedish companies that have posted good earnings. In Zurich, prices dropped, hurt by a weak dollar and selling in the pharmaceutical sector, partly on weak earnings. In Mexico City, where the bourse scored a record high the previous day, stocks fell as investors took profits. In Sao Paulo, shares rallied 2.8%, cheered by Brazilian government moves to cut the value-added tax on export products. In Buenos Aires, equities retreated after Argentine legislators wrangled over tax changes to shrink the government deficit. In Sydney, the market ended broadly higher, propelled by Wall Street's Tuesday rise, stronger Australian bonds and better-than-expected corporate earnings reports. In Hong Kong, shares rose, following seesaw dealings owing to indecisiveness about the bourse's direction and caution ahead of Thursday's futures expiration. In Seoul, equities lost 1.1% on worries about an oversupply of stocks, with the volume of new offerings expected to reach new highs in September. In Taipei, the bourse rose, paced by the petrochemical sector on rising product prices, and by technology issues on positive earnings. In Wellington, New Zealand, the main index advanced to a high for this year in heavy trading.
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