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Central Europe: Big institutions stay away from CEE bourses

More than two years after the enlargement of the European Union, many large equity investors remain convinced that the combined equity markets of central and eastern Europe are too small for them to invest in, despite a combined equity market capitalization of €211 billion at the end of 2005.

By Eric Jansson

The trouble is that this market cap is split between 10 bourses of greatly varying size. Warsaw, for example, posted €106.8 billion in equity market capitalization and Riga just €1.8 billion. While the growing EU aegis boosts access to equity in the region and limits perceived risk, investors must still pick through a highly fragmented trading environment in order to identify good buys.

A bigger target is Russia, so many emerging Europe investors head there, treating the space between Frankfurt and Moscow as fly-over territory. “We’ve had an extended commodities cycle. We have a high oil price. Russia’s the relatively low risk destination in some ways. Why not buy a Russian company that’s pumping oil out of the ground at $70 a barrel? Why not?” asks Paul Tucker, senior European finance analyst at Merrill Lynch.

In the new EU member states, by contrast, Tucker says: “From the perspective of a global institutional investor, there are not many companies to invest in. In Hungary you can buy three or four. In the Czech Republic you can probably only buy two.” The region’s smaller exchanges, such as those in the Baltic republics and Slovakia, are “very seriously off-piste” in Tucker’s view.

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