Hungary finds favour as Poland and Turkey hurt

Hungary, Poland and Turkey dominate in Eastern Europe once Russia has been taken out of the equation, although Hungary is the only market finding real favour with fund managers.

Polish valuations are attractive but just how long it will take for an earnings recovery is not clear, according to Ghadir Abu-Leil Cooper, emerging Europe specialist at Barings. Nine months into its term in office, the socialist government has failed to regenerate the economy.

Problems surrounding the 2002 and 2003 fiscal budgets have led to the surprise resignation of finance minister Marek Belka. Meanwhile, the Polish Central Bank has refused to loosen monetary policy despite signs inflation will fall below its year-end target. 'The economy remains very weak and any hopes of a sustained pick-up in the short to medium term are diminishing fast,' says Abu-Leil Cooper.

Niall Paul, head of emerging markets at Morley Fund Management, agrees. 'In Poland we would like to see more political stability before we would invest more.

'We are worried political interference in the economy is growing. We have started to see support of companies where debt downgrades would force restructuring on the corporate side, but in terms of economic policy, when the finance minister resigns because he can't balance the budget, it sends the wrong signals.'

Hungary is showing positive signs with a stable new government, the central bank is trying to achieve EU-style inflation, the currency is on track and there is little downside on currency depreciation ' one of the main aspects to get right across emerging markets recently. Paul says: 'Our focus in Eastern Europe is on Hungary where we are overweight. We like the macro in Hungary, it is a relatively safe haven in the region. We don't like Poland for precisely the opposite reasons, we find the politics relatively unstable, the recent resignation of the finance minister is seen as negative. The currency is overvalued and the economy is still in recession. The prospects for economic underperformance seem to be there.'

Meanwhile in Turkey there are also economic and political concerns. It is one of the worst performing markets in the emerging universe so far in 2002, according to SchroderSalomonSmithBarney (SSSB), with a dollar adjusted decline of 33%. The local ISE 100 index fell below 10,000 for the first time since last November.

'Turkey has had a bad year to date,' says Geoffrey Dennis, senior analyst at SSSB, 'This poor recent performance has been largely due to the combination of a high level of domestic and geopolitical risk and a weak economy. We foresee positive developments on all these issues, which will be needed for the market to outperform going forward.'

Abu-Leil Cooper agrees: 'In Turkey there is currently no sign of an economic pick-up. The poor health of prime minister Bulent Ecevit is causing concern and implementation of the new IMF programme has been put on hold.'

For the region as a whole a number of countries are negotiating for EU enlargement including Romania and Bulgaria. Hungary, Poland, Slovenia, Czech republic, Estonia, Malta and Cyprus are thought most likely to join in 2004 and 2005.

Stephanie Spicer

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