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Business

Young Stock Markets Seek Investors, Must be Risk-Friendly

"Caveat Emptor" -- buyer beware – should be the maxim for investors looking to take a chance on nascent eastern European stock markets, even though they are slated to join the European Union.

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Will new EU bourses put old ones in danger?

In May 2004, eight countries from eastern and central Europe are expected to enter the European Union, drastically increasing the number of EU capital markets. Of the eight, six are in eastern or central Europe: Poland, the Czech Republic, Hungary, Latvia, Lithuania and Estonia.

Yet newcomer financial markets like those in Warsaw, Prague and Budapest are far less developed than those in established financial centers like London, Paris or Frankfurt. And in countries like Latvia, Lithuania and Estonia, private investing has barely got off the ground.

The great divide

Just how great is the divide between east and west when it comes to stock trading? Total trading in the six eastern European candidate countries came to just €65 billion ($74 billion) in 2002 – a mere two percent of the value of all euro zone traded stocks.

In its July, 2003, monthly report, Germany's Bundesbank warned that taking the eastern European countries into the European monetary union is problematic, in part because the value of eastern capital markets is so far below the EU average.

Yet functioning stock markets will play an important role in EU candidate countries' integration in Europe, given that buying stock is one of the quickest and most targeted ways for investors to deploy funds across borders. Yet low trading volume in small markets such as Hungary and Slovenia presents a danger for investors, since very little activity can still have a huge effect on stock prices.

Looking west

To increase their volume, many companies based in EU-candidate countries are listed on western European stock markets. For example, the Polish telecommunications concern Telekom TPSA is one of the biggest publicly traded companies in a candidate country. The company isn't just listed in Warsaw, but also on the Berlin-Bremen and London stock markets. Trading volume in TPSA is higher on these bourses than in Warsaw, thus putting the Polish stock market at a disadvantage in terms of garnering fees – and making it harder for a stock-market culture to develop there.

Private investors in particular take enormous risks when investing in EU-candidate country firms, because it is more difficult to get detailed financial information on firms in these countries than on companies in more developed markets.

But there is a potential upside for investing in nascent markets. Cheaper prices and the potential for development means the chances for an outsized profit is that much greater.

A look at the recent history of two large listings from EU candidate nations makes clear the relationships between opportunity and risk: Hungarian health service provider Egis has lost one third of its value since July 2000, while in the same period, shares in Czech bank Komerzni Banka tripled in value.

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