Swiss franc carry trade props up eastern Europe

They may have bounced back from this summer's jitters, but heavy borrowing in low-interest currencies - notably the Swiss franc - has left the region's stocks exposed to a high level of currency risk.

Along with other emerging markets, eastern European stocks have bounced back from this summer's jitters they are up 9% this year. These stocks remain vulnerable to fluctuations in global risk appetite in the short-term, says Capital Economics, but the medium-term outlook is positive.

Convergence with western Europe is far from over. GDP per head in the Czech Republic, the region's richest country by this measure, is still less than half of the eurozone's $34,000. Strong credit growth has boosted consumption and fixed investment: the latter is set to grow by 25% in Poland this year. Throw in the fact that wage costs remain low and the region is set to expand by 6.5% this year and 6% next, reckons Capital Economics. And valuations look reasonable the MSCI Eastern Europe index is on a p/e of 13.

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