EUROPE- The Czech Republic, Hungary and Poland could provide a unique investment opportunity following their entry into the European Union, Aberdeen Asset Management believes.
The countries, which are the three largest to receive accession, are poised for significant economic growth over the coming years compared with western European states.
And the fund manger believes large-cap stocks could give significant returns – provided their governments implement the tough policies required to develop their economies and their structural reforms continue.
Aberdeen Asset Management head of emerging markets (ex-Asia) Joanne Irvine said: “This expansion of the EU has been labelled, by some, as a major investment theme for investors in the coming years.”
She added: “All three will continue to benefit from productivity improvements and having cheap, highly educated workforces.”However, this growth depends on how the countries react to the accession.
Irvine explained: “In order to adopt the euro each accession country will be required to meet the Maastricht criteria. The governments of the Czech Republic, Hungary and Poland will all have to deal with the problems of their current and fiscal account deficits.
“Consequently, we believe the coming years will see higher levels of volatility as investors gauge the success or failure of the monetary and fiscal policies the three governments implement. So going forward, foreign fund flows will be more specific to individual economies rather than the overall region.”
Irvine said weakness in large-cap companies – particularly in the banking and telecom sectors – would provide a buying opportunity.
“The market frenzy that has accompanied the Czech Republic, Hungary and Poland in recent years has meant many of their large-cap companies now trade on unattractive valuations relative to peers in Asia and Latin America.”
She added: “The availability of quality large-cap names trading on attractive valuations has also not been helped by the number of western European companies taking strategic positions in blue-chip firms.
“Many of these companies are from the banking and telecom sectors that dominate each market. Consequently, while within our global emerging market portfolios we are overweight central Europe we are underweight those sectors.”
However, Irvine said quality companies trading on reasonable valuations were available lower down the market cap scale.
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