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Central Europe: Some Stock Markets Afford Good Buys

Prague, 5 December 1997 (RFE/RL) -- There's a saying in world stock markets that when Wall Street sneezes, emerging markets catch cold.

That was certainly the case at the end of October, when the Dow Jones Index of most-secure ("blue chip") U.S. stocks plunged in reaction to a domino-like collapse of Asian economies.

Within a day of the Wall Street plunge, stock markets fell from Warsaw, Prague and Budapest through the Baltic states to Moscow.

Russia had been the world's hottest market, with share prices up 186 percent until the fateful day of Oct. 28, when the Moscow market took its sharpest nose-dive ever, losing 20 percent of its value. The Moscow Times index of 50 leading shares on the Russian market shed a staggering $15 billion in value in one day.

From their pre-crash high, both Hungarian and Polish share prices fell more than 19 percent. The Prague market fell 12 percent just on the news from Wall Street, and then plunged a further four percent -- the biggest one-day loss in 22 months -- the day (Dec. 1) after the government of Prime Minister Vaclav Klaus collapsed.

But there are three glimmers of good news in all this gloom. The first is that the way Central European and Russian stock markets react so closely to international developments is an indication of their development and a sign that they are no longer closed economies.

In Budapest, stock broker Laszlo Kozma at CAIB Securities says the Hungarian market is "highly reactive to international market movements because most of the investors are international investors. This means the Hungarian economy is an open economy." His words could apply to the Polish and Russian markets as well.

Estimates are that 50 to 60 percent of the Russian market is controlled by foreign investors. In Hungary, United States investors alone control 60 to 70 percent of the market.

The Hungarian market closely follows two world trends -- the Dow Jones index and the value of the U.S. dollar. When the dollar goes up, Hungarian stocks priced in weak Hungarian forints become even more of a bargain and Americans go on a spending spree in Budapest.

The second piece of good news, at least in Poland, Russia and Hungary, is that even after the drop in value of the stock market following the October downturn, share prices are still considerably higher than at the beginning of the year.

In Budapest, even after the drop, the index of stocks traded there is up nearly 60 percent for the year in forint terms, and up a still impressive 32 percent in dollar terms.

And the third piece of good news is an old nostrum from stockbrokers the world over: when prices fall, they always say it's a good time to buy while prices are low.

That's what they're saying in Warsaw, Budapest, Prague and Moscow these days.

Paul Baker, a stock broker at Polski Bank Rozwoju Brokerage in Warsaw, says: "I would personally buy stocks." But he says this sentiment isn't yet widespread. As he puts it: "Still too many people out there are jittery."

However, he says the Polish market offers good value because of what stock people call fundamentals -- healthy, competitive companies in a star-performing economy -- and because of the "transparency" of the Polish market.

"Transparency" means that stock dealings are made above the board in an open way that can be easily scrutinized by other investors and potential investors. "Transparency" is a quality much prized by investors, and not always characteristic of emerging markets.

Kozma, the Budapest broker, says there will still be good buying opportunities in the Hungarian market through the first few months of next year. However, he warns that parliamentary elections scheduled for next May will temporarily cause some political uncertainty that is likely to affect the markets.

Alone in Central Europe, the Prague stock market stands out as a lingering problem case. Far from having that prized trait "transparency," The Economist magazine wrote recently that the Czech market is "so murky that few foreigners dare invest in it."

The Wall Street Journal went even further, saying that the country has a reputation as "one of Central Europe's most treacherous places for unwitting investors."

Compounding fears about corruption and insider-dealing in the market are the Czech Republic's recent political woes. Says Martin Hlusek, an analyst at Expandia Finance in Prague: "Everything now depends on the development of the political environment, and politics are very unpredictable."

Czech Finance Minister Ivan Pilip has admitted that "political instability must influence the markets regardless of the relatively good macro-economic indicators that there are just now."

Others feel the Czech market can't go down much further. As Zdenek Tuma of Patria Finance put it: "Maybe some investors will be leaving (the market) but not many, because there are hardly any left in it anyway."

But analyst Hlusek is more optimistic: "After some time, there will be good buying opportunities in Prague too."