Sunnier outlook ahead for investing

The worst may be over for the Czech economy, according to optimistic reports from local analysts that have been underscored by a report from U.S. investment bank Morgan Stanley encouraging clients to invest more heavily in the Czech Republic.

Morgan Stanley's latest model equity portfolio, published June 25, upgrades the Czech Republic to its list of overweight economies, or those in which investments are likely to yield positive returns. The report also differentiates between CEE economies, encouraging investors to consolidate their regional investments in the Czech Republic.

"This month, we recommend switching out of Hungary into the Czech Republic," the report stated. "Our upgrade of the Czech Republic to [overweight] is driven by improvements in valuations and macro risk scores."

Morgan Stanley's report is unlikely to cause a monumental influx of foreign capital unless other large foreign banks begin to echo the report's sentiments. Nonetheless, it is a good sign for the Czech Republic that foreign investors are again expressing interest in the Czech economy after an investor exodus in the last quarter of 2008 and the beginning of this year, said Petr Sklenář, an analyst at Atlantik FT.

"The report could be one step that might increase the foreign appetite for Czech assets by rebuilding foreign investors' trust in the Czech economy," he said. "But the inflow of foreign investment will be slower than the outflow was."

The report is a clear sign that foreign banks have begun to differentiate among economies in the CEE region, a welcome relief to Czech analysts who have despaired at being lumped together with the ailing economies of Hungary and Poland in financial analyses of the past year.

"The Czech financial system is very stable and isn't dependent on foreign funding, which means Czech assets are on a significantly higher level than others in the CEE region, such as Hungarian or Polish currencies or bonds," Sklenář said. "Finally, the market has started to differentiate the countries within the region."

Morgan Stanley's report comes at a time when Czech analysts have begun to revise their economic forecasts for the next year, saying that the worst of the recession is behind us. Most analysts expect gross domestic product to contract between 3 percent and 3.5 percent. Nonetheless, most believe that the first quarter of 2009 - when the economy shrunk 3.4 percent, industrial production fell more than 22 percent and unemployment rose to nearly 8 percent - will be the worst of the year.

"The major economic decline was recorded at the beginning of the year, and I don't think we'll see the huge month-by-month declines we've seen already," Sklenář said.

Stephan Delbos can be reached at
sdelbos@praguepost.com