Beat the rush to Eastern Europe

published 31 October 2005

Eastern Europe is on a roll, says Kathryn Cooper in The Sunday Times. The region's stockmarkets have surged by about 60% over the past year and Polish and Hungarian stocks are now near record highs as investors have sought to cash in on the region's rapid economic growth. This is set for a further boost when eight Eastern European states join the EU in May, adding 75 million people to the single market.

Growth has been underpinned by improvements in government finances and reduced inflation, which has gradually lowered interest rates and thus boosted the economy. At the same time, "money has also poured in" from Western European countries keen to exploit cheap labour and a growing market for their goods as increasingly wealthy consumers up their spending. A recent upswing in consumption, along with strong export growth, should raise the region's average GDP growth to 4% next year, with the "Baltic Tigers" - Latvia, Lithuania and Estonia - set to keep expanding at 5%, says Wirtschaftsblatt.

But investors should beware of rushing straight into the region's markets, says Cooper. Jonathan Asante of Framlington notes that some markets, "especially Poland", now look quite expensive, and that Eastern European stocks tend to be illiquid. That makes the best bet on the region to buy Western companies with a presence there. Austrian companies - which have "sneaked into the region" over the past few years during a period when their potential rivals were bedazzled by "New Economy euphoria" - should be the prime beneficiaries of enlargement. About 80% of Vienna-listed firms are already profiting from an Eastern European foothold. Erste Bank, which boasts the region's biggest branch network, is benefiting from mounting consumer demand for mortgages and loans, as is its rival Bank Austria, which is receiving an additional fillip from Polish pension funds looking beyond Warsaw's small stockmarket. Packaging group Mayr-Melnhof, whose offerings include cigarette boxes and food packaging, is a play on rising consumption, while Telekom Austria, which has snapped up a number of local operators, is also in "a strong position" as spending grows. German retailer Metro looks a good bet, while HeidelbergerCement and Vossloh should respectively gain from the building boom and EU-subsidised spending on rail infrastructure.