Ahead of Bulgaria and Romania's accession to the European Union we take a look at how other emerging European markets have performed since joining.
In less than six months two more countries will be joining the European Union. They are Bulgaria and Romania. Both countries have been heavily profiled in the news over worries that a further influx of eastern Europeans may squeeze British workers' wages.
After they join the European Union in January 2007, both Bulgaria and Romania will be part of the largest economy in the world. And significantly, as newer and poorer members of the European Union they are expected to grow faster than the more established member states such as Germany, Britain and France.
By and large, double-digit growth amongst some emerging European countries is expected to trounce economic growth of their larger European peers. For instance, in the second quarter of this year Slovakia's economy grew 6%, while Hungary said its economy expanded 5%. Consequently, this may provide good opportunities for investors.
However, let's first take a look at how recently admitted eastern European countries have fared since their accession to the Union before we make any rash judgments.
The table below lists the stock market performance of seven eastern European countries that joined the European Union on 1 May 2004. For comparison, the performance of the FTSE is included, too.
| Country | Main Index | Value on 1/5/04 | Value on 31/9/06 | Change |
|---|
| Czech Republic | Prague PX | 823 | 1,445 | +76% |
| Estonia | OMX Tallinn | 339 | 664 | +96% |
| Hungary | Budapest BUX | 10,992 | 22,130 | +101% |
| Lithuania | OMX Vilnius | 217 | 390 | +80% |
| Poland | Warsaw WIG20 | 1,762 | 2,961 | +68% |
| Slovakia | Slovak SAX | 182 | 405 | +123% |
| Slovenia | Ljubljana SBI Top | 826 | 1,260 | +53% |
| UK | FTSE 100 | 4,385 | 5,906 | +35% |
The best performer has been the Slovakian stock market that has more than doubled in value. This is thanks to oil refiner Slovnaft that accounted for more than half of the index's rise. Vseobecna Uverova Bank has been another strong performer following a takeover by Italian bank Intesa.
The Hungarian stock market, led by oil giant Mol, has enjoyed a good run also. Hungary's largest energy company accounted for 42% of the benchmark index's rise. Pharmaceuticals have also contributed significantly to the BUX's ascent. Richter, which manufactures the "morning after" contraceptive pill, has doubled in value, and Egis, which is majority owned by the French laboratory Servier, has trebled.
In the main, it appears that economic expansion in eastern Europe has been reflected in the performance of their stock markets. What's more, even the worst performing eastern European market has thrashed the FTSE performance. So this appears to augur well for Bulgaria and Romania's accession to the European Union. But it may pay to tread carefully. High returns are generally associated with greater risk, and young stock markets can be volatile. The Russian stock market, the RTS, crashed 90% towards the end of the last century.
But if you are tempted to dip your toes into eastern Europe, then iShares MSCI Eastern Europe
(LSE: IEER)
may provide a low-cost route. The Exchange Traded Fund aims to provide investors with a good return by tracking the MSCI Eastern Europe Index. The iShares can be wrapped in an ISA, which will protect your gains from the taxman.
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