Eastern European Markets
September 12, 2006

Attractive Opportunities in Second Wave Countries and Small Caps

Benign U.S. inflation data and a pause in interest rate hikes flooded the global markets with optimism. Increase in global equity prices was accompanied with a rally in U.S. treasuries and a decline in emerging market spreads. In August the Central and Eastern European (CEE) equities traded lower on light volume despite stronger global markets. Relative weakness probably derived from the final round of re-balancing of certain MSCI indices.

The Hungarian Forint was once again hit (-1.6% vs. the EUR) while the Zloty also ended marginally lower after a stronger beginning of the month. In Poland the market suffered from a broad-based sell-off with the commodity-driven stocks down the most (PKN refiner –15%, copper producer KGHM –11%) and the blue-chip banks declining by 8-9%. In Hungary MOL refiner slumped by 9% and OTP bank by 3% with only export-oriented Richter pharma bucking the trend (+1%). Prague market ended August higher on the back of strength in Erste Bank (+5%) and Komercni Banka (+2%). Small and mid-caps in Poland were also weaker with the MidWig index declining by 2% but news-driven strength was evident in Hungary and Croatia.

Croatia continued its strong streak backed by strong local retail and institutional interest. Takeover story of Croatian pharma company Pliva and exceptional year-to-date returns have lured local retail into the stock market creating a buying frenzy. During the last days of August the battle between Barr and Actavis gathered steam as the latter published a new bid for Pliva, topping Barr’s offer by 7%. Expectations are that Barr will make another counter-bid.

The unit NAVs of Trigon funds returned as follows in August: Trigon Central and Eastern European Fund -1.5%, Second Wave Fund +1.8%, New Europe Small Cap Fund -1.2% and Top Picks Fund -1.1%. Year-to-date the funds have returned +5.7%, +24.8%, +10.8% and +4.6% (launched in February) respectively.

Taking that the MSCI-re-balancing-related weakness in August was one-off in nature, we would expect the CEE equities to re-gain some of the lost ground at least on a relative basis, in the next 1-2 months. Attractive opportunities are still abundant in the regional small and mid-cap universe. However, we continue to believe that the risk-reward relationship for most regional “blue-chip” equities is still not favourable and that better entry points are likely to emerge later this year.

As many blue-chip companies are near life-highs again, we see in 2006 the best potential in the second wave countries and regional small caps. Therefore, we recommend investors targeting medium risk levels to invest 35% of their emerging Europe equity portfolio to Trigon Central and Eastern European Fund, 30% to Trigon Second Wave Fund, 25% to Trigon New Europe Small Cap Fund, and 10% to Trigon New Europe Top Picks Fund. Investors with a high risk appetite could hold the funds with a 25:35:30:10 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

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