Central Europe and the GCC private investors

Dubai - Poland's stocks performed well in 2015-16, writes Matein Khalid

Central Europe has been one of the more neglected areas of investment for Gulf private clients, even though UAE sovereign wealth funds have invested in Austria's state oil firm, Serbian property projects, Polish banks and Romanian oil drilling and exploration companies. I have travelled extensively in the region in a quest to analyse its economic and financial potential. This region, the former Habsburg empire, later the Warsaw Pact satellites of the USSR, suffered terribly from the Balkan wars of the 1990s, the wars in Croatia, Bosnia and Kosovo. The election of populist, nationalist governments in Budapest and Warsaw is also a deterrent to foreign capital inflows. However, the region boasts fabulous property investment opportunities, some of the highest economic growth rates and literate populations in Europe and some of the best managed blue chip growth companies in the emerging markets - all within the protective umbrella of EU membership.
The most compelling reason to invest in Central Europe is the evolution of vibrant consumer economics in places like the Czech Republic and Poland, historically beneficiaries of the German industrial colossus. It is possible to earn double the yield in Grade A office buildings in Prague let out to multinational tenants than it is possible to earn in Munich or Berlin. The fall in crude oil prices makes Central Europe a valuable hedge for GCC based investors who have significant exposure in India or Southeast Asia. Croatia, "the Mediterranean as it once was" is one of the most hauntingly beautiful places on earth, its Adriatic coast a playground for Roman emperors and post-Soviet Russian oligarchs. A Dubai investment bank has even invested in a Croatian yacht and marina resort.
I do not want to gloss over the significant risk of investing in Central Europe, as in any other province of emerging markets. The region's capital markets and banking systems are dominated by Austrian, Italian and French banks who contract cross-border flows in times of banking stress, as in 2008-9. The Law and Justice Party in Poland and Fidesz government of Viktor Orban in Hungary have embraced economic nationalism as state policy, a clear threat to the interests of foreign investors. The war in Ukraine's Donbass, the highly unstable (and uninvestable) western Balkan states of Macedonia and Albania, Russian influence in corporate boardrooms and occasionally xenophobic economic policies are, unfortunately, also risks to Gulf investors. For instance, it is pointless to invest in Hungarian energy, telecom and banks since Viktor Orbán seeks to do a Putin and exert state control on companies ostensibly privatised in the 1990s post-communist transition. Poland's banking tax or coal industry protectionism is another example of a Warsaw government that defies the norms of pro-market economic policies. Yet Poland is largest economy in the region with wage rates that are just about one third German levels, making it a leveraged play on German auto/industrial growth. Poland's stock market has also provided amazing opportunities in 2015 and 2016, mainly in the midcap sector.
Hungary is a highly-developed economy in the heart of central Europe and Budapest was once the twin capital of the Austrian Empire, this nation's investment potential has been crippled by Viktor Orban's statist and even autocratic policies. In any case, the Hungarian government has clashed with the EU and Berlin over political reform, privatisation and immigration, a red flag for global investors.
I believe the Czech Republic is ideal for property market investors as it is stable, wealthy, highly well developed and boasts public infrastructure that even rivals France or Germany in some aspects. Prague is one of the world's most beautiful cities, the city of Kafka and Milan Kundera I love. The Czech Republic is also the emergent auto component, electronics and information technology hub of central Europe. The Czech kroner is also undervalued, now that Prague has removed caps on its potential appreciation. If any nation is destined to emerge as the Singapore of Central Europe, my bet is one the Czech Republic. It does not hurt that Emirates flies nonstop to Prague from Dubai too. The frontier market Cinderella of this region, for me, is Romania, the land of Count Dracula, Saxon castles and mountain bears.