Portfolio Investment in Central and East Europe


The equity markets of the former communist countries in Central and East Europe are approaching western standards, even though at different paces. According to western portfolio managers, Hungary, Poland, and Estonia have progressed most in the on-going reform process. By contrast, the Czech Republic and, even to a greater extent, Russia have still some catching up to do. These are the findings of a current study carried out by the Centre for European Economic Research (ZEW) in Mannheim.

The study analyses the attractiveness of East European equity markets from the point of view of institutional investors. In a survey conducted by ZEW portfolio managers from more than twenty large West European investment funds specialised in East Europe were asked about their criteria for investment decisions. After that they were supposed to assess the following countries according to those criteria: Poland, Hungary, the Czech Republic, Slovenia, Estonia, and Russia.

The liquidity of the markets was named the most important investment criterion by the managers, which are responsible for a total fund volume of EUR 2.3 billion in East Europe. However, none of the East European countries wholly fulfil this criterion. Even Hungary and Poland, which are the most liquid markets of all those considered, were merely rated as "satisfactory". The second most important criterion for the portfolio managers are the management skills of the companies in whose shares they want to invest. Here, Slovenia and Hungary perform particularly well - probably due to the fact that in these countries the centralised planned economy has never been as well developed as, for example, in the Czech Republic. Accordingly, Russian and Czech managers receive the lowest marks.

However, the western fund managers use a variety of additional criteria for their investment decisions. For example, it is of great relevance whether a country has a stable legal and political system. Positive evaluations for Poland, Hungary, Slovenia and Estonia show that these countries have come far on their way to being incorporated into the European Union. In addition to good conditions, an investment must also be promising in terms of revenue. Hungary and Estonia are thus rated higher by the financial experts due to their higher productivity and their greater competition on the markets. In terms of the qualification of the workforce, there are hardly any differences between the countries considered in this study.

There are, however, important differences when it comes to the regulation of financial markets. In the Czech Republic, Slovenia, and Russia domestic and foreign investors are not treated equally. This is probably due to the poor transparency of the Czech and the Russian markets as well as investment barriers in the Slovenian market. The protection of minority shareholders has so far proven to be rather poor in all countries, with the exception of Hungary and Estonia. Trading standards, listing criteria and disclosure obligations are most strict in Poland and Hungary, according to the fund managers.

In recent years, all countries have greatly adjusted their financial market regulations to EU standards. However, it depends on how these regulations are implemented in practice, the fund managers say. In the Czech Republic and especially in Russia, for example, the implementation is inadequate.


Dr. Jens Köke, E-mail: koeke@zew.de