Despite a favourable economic backdrop in Central and Eastern Europe, portfolio investors are facing new challenges. A number of mainly global factors, that had positively influenced the investment climate in 2004, are likely to turn out less benign this year:
Global economic growth, which had reached a 30-year-high in 2004, will slow down and growth in euroland is again likely to disappoint;
U.S. interest rates, which still had been accommodative in the previous year, will continue to rise – probably followed by a rate hike by ECB later this year; and
the risk appetite of investors, reflected in their demand for risky assets such as Emerging Markets equities and fixed income, may dwindle going forward.
No change in direction – but volatility increasing
Positive developments are prevailing within the region: CEE’s growth lead over Euroland will remain in the two to four percentage points range. Inflation in most countries is anticipated to fall during the course of the year. Moreover, fiscal and foreign trade imbalances will ease gradually. In addition, as a result of EU accession, CEE is now presenting itself convincingly as the area of growth and reform in Europe offering a low-cost and low-tax environment to corporate investors from Western Europe.
At the same time, intra-regional sector consolidation has speeded up during the past few months: Companies from the Czech Republic, Poland and Hungary (such as CEZ, MOL, Magyar Telekom, OTP, PKN) are expanding via acquisitions within CEE, especially in the South-East.
Downturn of equity markets likely to be only temporary
While the fundamental backdrop in CEE remains constructive, investors have to expect more volatility, triggered by politics (elections in Poland and Bulgaria, turbulences in the Czech Republic) or by economic events (interest rate policies). In the short term, pressure on local currencies may persist. Near-term there is room for Eurobonds spread tightening, but further rate hikes in the U.S. may lead to a revaluation of Emerging Markets credit risk in the course of this year.
Mid-March, for the first time this year, EMEA equity funds withdrew money from the region; however, the outflow was minor. Still, the year-to-date net inflow remains above USD 2bn. Consolidation does not fully come as a surprise, given the unforeseen surge in share prices since the beginning of the year and also considering that CEE equity valuations rapidly approached Western Europe levels during the past twelve months (in the case of Czech Republic even overtaking them).
“Given the relatively sound economic backdrop and the vigour in the corporate sector, we do not anticipate a longer-term downturn in CEE equity markets”, Szopo said. He stated that IPOs in Poland and Russia as well as emerging interest for South East Europe (Bulgaria, Romania, Ukraine, and Turkey) have broadened the range of investment opportunities of regional investment funds, which, in turn, is likely to attract additional capital inflows.
BA-CA started its successful CEE/SEE operations 30 years ago with the opening of a representative office of the former Creditanstalt in Budapest/Hungary. After the collapse of the Iron Curtain, BA-CA continued to expand into the other CEE/SEE countries. Today, the bank is active in 11 countries. In cooperation with HVB Group, which has operations in Russia, Ukraine and the Baltic States, it is represented in a total of 16 markets.
Bank Austria Creditanstalt is member of the HVB Group, one of the leading banking institutions in Europe, and is responsible for the Group’s CEE/SEE markets. HVB Bank Romania was established in September 2001 as the legal successor of Bank Austria Creditanstalt Romania, which was originally founded in September 1998. HVB Bank Romania serves over 30,000 clients through its 12 branches opened in Bucharest, Timisoara, Oradea, Cluj, Brasov, Constanta, Sibiu and Arad.
