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Why investors are piling into eastern Europe


You might not be going to eastern Europe for your holidays this summer – but so far as a lot of investors are concerned, the region is currently hot, hot, hot.

The Hungarian stock market, which has risen by one-third during the past year, hit a new all-time high earlier this week.
The Polish stock market is also up by a third and the Romanian stock market by almost a quarter.
Other eastern European markets to have put in a strong showing include the Czech stock market, which is up by a sixth, while the Slovenian and Serbian stock markets are up by almost as much.
So what is going on? Partly, it’s because the economies of central and eastern Europe have been growing strongly this year.
The Czech Republic, Romania, Poland, Hungary and Slovenia all saw their economies grow by more than 1% during the first three months of the year, compared with the paltry 0.2% notched up by the UK, 0.3% in the United States and 0.6% across the eurozone.
Romania, the star performer, grew at a remarkable 1.7% during the quarter.
All have relatively low unemployment: the Czech Republic’s jobless rate, for example, is just 3% and Hungary’s just 4.3%, even lower than Britain’s.
Other economic indicators, such as industrial production and retail sales volumes, are also strongly heading in the right direction.
In many cases, notably the Czech Republic and Romania, their economies have been performing more strongly than expected.

Image: The Romanian stock market is up by almost a quarter
This is partly because they are in close proximity to the eurozone where, after years of stagnant or no growth, there are finally signs of expansion.
The Czech Republic, in particular, has an economy strongly connected to that of Germany.
In some cases, it is because the countries themselves have been pursuing expansionary policies.
A good example here is Hungary.
Its central bank, the National Bank of Hungary, has just announced it is keeping its main policy rate at 0.9%, in spite of recent strong growth, arguing that any resulting inflation will be felt further down the line.
This is despite a recent uptick in foreign direct investment and the very low levels of unemployment in the country – all of which, in other circumstances, might be expected to lead to an inflationary surge.
Its governor, Gyorgy Matolcsy, has been in place just a few months longer than the Bank of England’s Mark Carney and, like Mr Carney, has yet to preside over a rise in interest rates.

Adding to this has been a growing appetite among investors everywhere for emerging market assets.
The lion’s share of such investment inevitably goes to China and other Asian economies.
However, partly due to political scandals in other previously popular emerging markets, notably Brazil and South Africa, along with unease about the extent to which China’s growth is sustainable, it is clear some investors are looking anew at central and eastern Europe.
And there is another, crucial, reason why these economies are interesting investors – the US dollar.
A stronger dollar tends to hurt emerging market economies, mainly because so many of them depend on exports of commodities, which are priced in dollars and therefore become more expensive when it rises.
Central and eastern Europe are less dependent on commodity exports but still tend to suffer when the dollar rises.
This was supposed to be a year in which, due to interest rate hikes by the US Federal Reserve, the dollar strengthened.
But instead the greenback has been decidedly weak in recent weeks as expectations of more US interest rate rises have been pared back and many central and eastern European countries have seen their currencies appreciate against it accordingly.
At the start of the year, one US dollar bought 293.5 Hungarian forint. Today, it will buy just 264.4.
Similarly, from buying 25.8 Czech crowns at the beginning of the year, one dollar now buys just 22.5.
The biggest gainer of all has been the Polish zloty, which is up some 14% against the dollar this year.
Each of these three currencies have now hit their highest level against the dollar for two years.
So some investors are buying assets in these countries in the expectation of further appreciation in their currencies.
All of these economies still have their weaknesses.
Poland, for example, has an export market too heavily dependent on low value-added goods. Hungary has an autocratic government. Romania has poor infrastructure and a skills shortage.
But, for now, the sun is shining on much of central and eastern Europe.

Source: Sky

About Business Ideas UK

My name is Joel Bissitt. I have been an entrepreneur for 24 years and have run many small businesses across various sectors. For the last 10 years I have worked mainly within online media, franchising and small business start-ups. I am an author of various websites including Franchise UK https://www.franchise-uk.co.uk

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