Local Capital Sought in East

LONDON -- Stock markets in central and eastern Europe will only grow if they encourage the development of local financial institutions, fund managers and bourse professionals told a recent conference on the region.


"These markets are beginning to be used to mobilize local savings, and we see them as countries where it won't necessarily be foreign capital that makes it happen," said Glenn Wellman, who manages the $197 million CS First Boston Central European Growth Fund.


Equity trading levels in the region have come off sharply from the peaks of last year as foreign hedge funds have targeted Russia, while domestic retail investors are reluctant to sell below the highs of 1993.


Wellmann said he expected share prices to recover once funds shifted from retail investors to institutions.


The region accounts for 2.6 percent of world stock exchanges' market capitalization, according to Peter Wall of the International Finance Corp.'s Emerging Markets Database. Eastern Europe "is one of the fastest growing areas of international trade and investment," Wall said, although he added, "It is experiencing growth from a very low base."


Wieslaw Rozlucki, the president of the Warsaw stock exchange, said the preponderance of retail investors had caused a large part of the recent volatility in Polish share prices.


The market, which rose 700 percent in 1993, has come off a high of 20,760 points in 1994 to 7,903 at Monday's close.


He said that although the number of trades was high, at 45,000 per day, the average amount was between $2,000 to $3,000.


"We feel the shortage of domestic investment funds is a bottleneck. The market cannot develop further based on retail investors," Rozlucki said.


Though foreign investment accounts for 25 percent of the Warsaw bourse's market capitalization, portfolio investment is only about 10 percent, he said.


Poland's WIG index, comprising 40 companies, is capitalized at about $3.4 billion. Poland, which is looking to sell 440 companies via a mass privatization scheme in 1995, is to set up 15 investment funds with foreign participation to absorb the new shares. This will increase equity market capitalization by $4 billion.


Poland's see-saw share market has also frightened off foreigners, said Michael Phair, an executive director of NM Rothschild, U.K.


He said the 13-fold rise in the share price of Bank Slaski between the pricing of the issue and the first day of trading was "clearly unsustainable" and noted that since then the bank had underperformed the WIG index by 30 percent.


"Most of these markets cannot take considerable amounts of stock at the moment. There needs to be an international tranche," Phair added.


CS First Boston's Wellman said that although privatizations had succeeded in transforming ownership of companies, they had not introduced real capital into the market. He expects Hungary to build on its two existing pension funds and mutual funds to be built up in Slovenia and Poland.


Rothschild's Phair is looking to the privatization of utilities to broaden share ownership in the Czech Republic and Poland. He noted that banks dominated the Polish market, with six stocks out of a total of 40, and accounting for one-third of market capitalization.


"Balance must be restored to the market and non-banking shares issued. The failure to privatize utilities is a missed opportunity for popular capitalism in Poland," Phair said.