Nicholas Watson in Vienna -

Like other funds in the region, Erste Sparinvest has found little to trouble it in the US sub-prime crisis. Unlike many other funds in the region, it's keen on that seeming perpetually troubled Balkan country, Serbia.

"We are very keen on Serbia from a strategic point of view. There is huge potential in Serbia in terms of selling funds and the development of the stock market, even though liquidity and turnover are still quite low," says Gunther Mandl, the head of asset management in Central and Eastern Europe for Erste.

Indeed, Erste is putting its money where it mouth is. After entering the country in August 2005 through the acquisition of 83.3% of Novosadska banka in Serbia, the Austrian bank now intends to widen its services by selling its funds to retail investors in Serbia, where it sees other major fund players in region also setting up shop.

The stock market in Serbia has been a volatile, though highly profitable, place for investors over the past 12 months. The main index, the BELEX-15, posted its sharpest-ever rise of 13% on May 12 after a pro-European coalition of Serbian parties defeated the nationalists in the general elections. This sharp turnaround in the index followed a plunge of 26% over the period since the Albanian-majority Serbian province of Kosovo unilaterally declared independence on February 17. Over the past month, the BELEX-15 index has swung as good, then bad, then good again news emerges about what the eventual government will look like - a pro-European coalition or one dominated by nationalist parties.

While the Belgrade Stock Exchange itself sees good scope for the expansion of investment funds, its head, Gordana Dostanic, says the government needs to list more of the larger state companies - such as oil firm NIS, JAT airlines, Telekom Srbija, the utility EPS and Belgrade Airport - on there to give investors more choice. "There is a lot of capacity for new investment funds and for expansion of the ones that already exist, but new securities of higher quality are needed," she told bne. "Foreign investors are not just attracted by companies with huge capitalisation, but also by energy and telecommunication companies, and this is what all those public companies are. All the other stock exchanges in region already have companies from energy and telecommunications in their market."

Erste too, while positive about on the whole about an economy it expects to grow at a rate of 6% this year, is still cautious about Serbia given the political instability. "The political risk in Serbia remains high, with the potential to influence economic developments strongly," Erste said in its latest country report on Serbia. "[But] we continue to stick with the scenario that Serbia will remain on the EU track and, in the mid-run, continue its successful convergence story."

That overall theme of convergence and wealth management for the region lies behind much of Mandl's optimism. "On overall themes for the region, what I'm seeing now is something that has started already but which is accelerating, and that's wealth management. This is the big thing coming in the next couple of years."

A recent survey, Mandl quotes from, found that the average investor in Central Europe is willing to invest €200 per month into some portfolio solutions. "This level was a big surprise for me."

Negligible effect

Overall, Erste sees or no impact in the CEE region from the credit crisis in the US - and in any case believes that the worst is over there too. "The crisis effect has really been negligible, more important has been the slowdown in Euroland stemming from the US slowdown," says Mandl. "We will see some more write-downs, but the worst is over." Likewise, Erste sees the inflation problem in the region abating slightly as a better harvest this year eases food price rises and a certain amount of base effect limits any second-round effects from this year's high inflation.

For Erste's bond fund, the ESPA Bond Danubia, the drive force behind its performance has been and will continue to be the convergence of the region's economies. As of May, the fund was up about 38% since October 2003. "There is still a tremendous amount of potential growth in Eastern Europe," says Anton Hauser, fund manager of the ESPA Bond Danubia. Some three-quarters of the bond fund is invested into local currency assets, with bonds denominated in polish zloty, Hungarian forint and Turkish lira as the top-three holdings.

Like other equity funds in the region, Erste's ESPA Stock Europe-Emerging fund heavily favours Russia, which makes up over 60% of the fund. "On Russia, we believe that the smooth change from Putin to Medvedev has given us confidence that reforms will continue, so there will be a stable development of the economy and political sphere."

Of course, returns from Russian oil companies have helped drive the fund's performance - the fund is up 34% in the three years to the end of May though down 1% in the past year - but surprisingly given the recent financial turmoil on the world's markets, Mandl is also positive on Russian banks. In fact, Sberbank is currently the fund's top holding, followed by Lukoil, Gazprom, Norilsk Nickel and VimpelCom. "There are so many residents in Russia who are still not using any kind of bank account - the basic services are just not developed there."

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