Eastern European Markets
January, 9. 2006

Trigon: Polish Small Caps Are Taking Off

In December the Central and Eastern European equity markets continued to climb modestly but the action was mixed with a large number of liquid stocks ending the month lower while Polish small and mid-caps finally outperformed on the back of strong inflows into the domestic mutual funds. The NAV of the unit of Trigon Central and Eastern European Fund increased by 2.2% and that of Trigon New Europe Small Cap Fund by 3.6%. The NAV of Trigon Second Wave Fund declined by 0.4%. In full year 2005 Trigon CEE Fund gained 32.2% and Trigon Second Wave Fund 25.3%. In three years Trigon CEE Fund has provided investors with a return of 129%.

The question on many investors’ minds is if we have seen it all by now or will these markets continue providing investors with strong performance going forward? We believe that with a few exceptions (Hungary) the New Europe markets and especially Poland with accelerating GDP growth will be supported by strong fundamentals for 2006 and 2007. New European economies are expected to grow on average by 4.7% in 2006 compared to eurozone's 1.9%. In addition, the relatively low interest rate environment makes the New Europe region defensive in nature - the under-leveraged consumer is expected to boost domestic demand and thus economic growth.

Blue-chip companies earnings growth is expected to decelerate due to sharply lower contribution from energy and commodity companies, and a high base in banking sector results. However, we expect small and mid-cap companies and certain other segments of the market to post strong profit growth going forward (15-20%) - these are the segments to which we make most of our investments today.

The risks of investing into New Europe in 2006 are mainly associated with external factors - global fund flows and investor risk aversion. Therefore we recommend investors to pay close attention to credit spreads that have historically driven sentiment towards emerging markets. Based on the above we believe that going into 2006 it is important to be invested in either fundamentally undervalued companies showing good profit growth potential that we can today find in Poland, Croatia and Romania, especially among small and mid-caps (trading at and below 10 times earnings), or in good dividend-payers (our CEE Fund has a weighted average dividend yield of 4.5% in 2006 and 6.1% in 2007); to avoid popular expensive stocks driven by emotional international flows (especially blue-chip banks and energy); and to take a close look at macroeconomic fundamentals favouring countries with strong and balanced growth.

We believe January is a good time to add to one's positions for 2006, especially to the Small Cap Fund as Polish institutional investors have become active in buying Polish small and mid-caps. We recommend investors targeting medium risk levels to invest 65% of their emerging Europe equity portfolio to Trigon Central and Eastern European Fund, 15% to Trigon Second Wave Fund and 20% to Trigon New Europe Small Cap Fund. Investors with high risk appetite could hold the funds with a 50:20:30 proportion. Further information on our funds is available at

For further information:
Kristel Kivinurm-Priisalm
Partner, Head of Asset Management
Trigon Capital
Pärnu Road 15
10141, Tallinn
Tel. +372 6679208
Fax. +372 6679201
Mob. +372 5112242
Email mailto:

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