Stock Markets of Eastern Europe more Attractive


East Europe is on the rise. These are the findings of a study conducted by the Centre for European Economic Research (ZEW) in Mannheim among financial market experts.

According to the expert recommendations, Central and East European stocks should have an average share of 5.6 per cent in an optimal global portfolio. This is significantly more than the actual size of the East European equity markets. At the end of 1998, the stock markets of the Central and East Europe countries, including Russia, only held a share of about 0.2 per cent of global market capitalization.

The optimal portfolio for East Europe should be composed as follows, according to the surveyed financial experts: Hungary and Poland are the heavyweights with 23.4 and 22.3 per cent, followed by the Czech Republic with 18.3 per cent. Russia, which has the strongest economy of the East European countries, should make up 14 per cent. A significant share of the East portfolio is allocated to Estonia (6.6 per cent) and Slovenia (9.5 per cent), which are rather small compared to their neighbours. Other countries in this region play a rather insignificant role with a total of six per cent.

Compared to the actual size of the East European equity markets (as measured by its capitalization), the small economies are clearly overvalued. In late 1998, the Estonian stock market for example merely accounted for 1.3 per cent of the capitalization of the East European stock exchanges instead of for 6.6 per cent as in the recommended portfolio.  Taking as an exclusive reference the capitalization of the shares that are available for portfolio investors - the free float -, Czech and Estonian shares are rather overweight, while Russian and Hungarian shares, by contrast, are strongly underweight.

On the whole, the financial experts recommend that a portfolio of Central and East European shares should continue to contain mainly Hungarian, Polish and Czech shares, for these are the largest equity markets. According to the experts, investors should also consider small economies - especially Estonia, which is known for its investors-friendly policy. The current portfolio recommendation differs considerably from the actual portfolios of purely East European funds in 1999. In a survey conducted in spring 1999 among portfolio managers of western East European funds, ZEW found that Poland and Hungary account for the largest share in the East portfolio with each accounting for about a third. The small size of the Estonian and Slovenian economies corresponded largely to the size of their stock markets in the portfolio.  According to the expert opinion in January 2000, shifts in the East portfolios' composition are necessary:  The weights of Polish and Hungarian stocks should be reduced in favour of Estonian and Slovenian shares. However, Russian shares may also be increasingly included again after the crisis of 1998.


Dr. Jens Köke, E-mail: