Is there still eastern promise in Europe?

After some stellar returns from the CE3 markets of the Czech Republic, Hungary and Poland, we assess their prospects and name which of the three we favour most.



Rollo Roscow
Emerging Markets Fund Manager

The CE3 markets of the Czech Republic, Hungary and Poland performed relatively well in 2021. All three economies bounced back from the initial pandemic shock, as their path to normality found a more sustainable footing. As a result, growth and inflation took off across the region.

The equity markets of all three countries generated strong returns last year and outperformed their emerging market peers. Particularly the Czech Republic, which was the best-performing market in emerging Europe and emerging markets globally, as measured by the MSCI EM Europe and MSCI Emerging Markets indices.  

The Czech Republic and Hungary are of course small, and hence to some extent driven more by the performance of individual stocks. Given such outperformance though, it is worth checking in on the outlook for all three markets.

How are the CE3 managing Covid-19?

Daily new cases of Covid-19 have accelerated sharply, driven by the more infectious Omicron variant. As the chart below shows, cases had already been at elevated levels in the final quarter of 2021, owing to a winter resurgence in the previously dominant variant, Delta. Indeed these figures may well understate the true number of cases, given limits in testing relative to the rapid spread of the virus.  


Despite a strong start, vaccination progress in the CE3 stalled somewhat in 2021, and at least a third of the population of all three countries has not had a single vaccine dose. Vaccine penetration is behind that of the wider European Union and other major global economies as this next chart shows. The combination of high infection levels combined with lower vaccine penetration has sadly had a human impact, even if death rates are now falling.        


So far any additional restrictions on activity have been comparatively limited, as this next chart shows. Moreover, with each wave of the virus, economies have continued to adjust to managing with those measures which are required. As a result, concerns over the economic impact have eased. That said, there may be implications in terms of supply chain disruption, as has been seen globally.


Is the macroeconomic outlook still bright?

Czech Republic

The Czech economy is forecast to see continued recovery in 2022, with an expansion of 5% in GDP projected. This would bring the economy back to its pre-pandemic level. In the near term, a sharp rise in daily new cases of Covid-19 continues to impact the country. Some activity restrictions have been re-introduced, albeit with a more limited impact on the economy. However, disruption to supply chains remains a concern.

These issues should recede this year, with strong support from exports and the EU recovery fund driving growth. In contrast to the other CE3 markets, the Czech Republic has already started to receive funds from the EU.

The key risk to the outlook is from rising inflation, which accelerated to 6.6% year-on-year (y/y) in December, and sits well above the central bank’s 1-3% tolerance band. As this next chart highlights, rising inflation is a common theme across the CE3, due to strong growth. Inflation is expected to continue to rise in the coming months, potentially exceeding 7.5%, before easing from Q2 onwards.

The central bank has so far responded by hiking its policy rate by a total of 350bps since June 2021. We expect further rates rises to follow, with markets now pricing in a peak at 4.5%. The central bank has also taken macro-prudential measures to cool housing demand.

A general election was held in October with the liberal conservative alliance SPOLU coming to power. We expect the new government to be fiscally prudent and to maintain good relations with the EU.  



The macroeconomic outlook in Hungary is similar to that of the Czech Republic; a continued recovery from the pandemic is anticipated in 2022. Inflation is also high in Hungary, but the main risk stems from upcoming parliamentary elections in April.

The key opposition parties have formed a coalition, United for Hungary, to try to remove the incumbent Fidesz-KDNP led government, which has been in power since 2010. Opinion polls suggest that it will be a tight result. Given these polls, there is a greater likelihood that fiscal spending continues through to April, providing a further boost to already rebounding economic activity. This would only add to medium term inflation risks.

Headline inflation was 7.4% y/y in December. The central bank raised its policy rate by 30bps to 2.4% in December, taking total rate tightening to 180bps since June 2021; we expect further rate hikes to follow. The central bank has also ended purchases through its quantitative easing programme and has used unconventional methods to support its currency, the forint. The current account is still in surplus once foreign direct investment is taken into account.

The EU recovery fund should also be positive for economic growth. However, risks remain as an EU crackdown on oversight issues in Hungary could negatively impact the absorption of this funding. In the medium term, erosion of the institutional framework in Hungary poses a further risk to growth, as this could eventually undermine foreign direct investment.


Economic growth in Poland has already recovered and surpassed its pre-pandemic level. The outlook remains strong, supported by the EU recovery fund. Poland’s relationship with the EU has been a source of volatility though, and is a key risk to monitor.

Poland is scheduled to receive €36 billion in funding from the EU recovery fund. However, tensions between the government and the EU have been escalating due to concerns over rule of law/judicial independence. It now seems unlikely Poland will receive its initial €5 billion funding tranche in early 2022, and is more likely to receive this in mid/late 2022, assuming a settlement is reached with the EU. Public support remains overwhelmingly in favour of the country remaining in the EU but, under the PiS-led government, the relationship looks likely to continue to be strained. 

As with the other CE3 markets, headline inflation has been rising, reaching 8.6% y/y in December. The central bank reacted to accelerating inflation by raising its policy rate to 2.25%, with hikes totalling 215bps since September. Recent electricity and gas tariff hikes have raised the inflation profile further, but will be softened somewhat by the government’s “Anti-Inflation Shield”, a package of temporary tax cuts.

With inflation expected to reach 6-8% this year, well ahead of the 1.5-3.5% tolerance band, we anticipate the headline interest rate will reach at least the 3-4% range. Households are well placed to manage the impact of rising rates, as debt service costs are low as a percentage of disposable incomes, and as the nominal wage growth outlook is strong.

The current account has deteriorated in recent months, and further deterioration in October brings the rolling 12-month current account slightly into deficit. There are some temporary drivers from supply chain bottlenecks and it is likely that the current account remains in a small deficit in 2022, as the normalisation in supply chains gets pushed out. This does remove the buffer to zloty weakness, and adds pressure on the central bank to be more hawkish.

How do valuations look?

The first point to note when looking at valuations for these markets is that both the MSCI Czech Republic and MSCI Hungary indices comprise only a small number of stocks.

On a 12-month forward price-earnings basis, Hungary looks notably cheap compared with its historical average. Poland also trades below its historical average, while the Czech Republic is slightly above its historical average.


Looking at price-to-book shows a similar picture, while the view is reversed on a dividend yield basis, with Hungary the most expensive relative to history, although all three markets are above their historical means.

The chart below illustrates the combined picture, with Hungary and Poland the cheapest relative to history.


From an earnings perspective, revisions in all CE3 markets remain positive, and compare favourably with elsewhere in EM, albeit with the small market caveat emphasised above.


What about the risks from geopolitics?

While the CE3 economies are not likely to be involved directly in any potential conflict between Russia and Ukraine, there could well be an impact on valuation sentiment in the short term due to regional risk perceptions.

We would not expect there to be significant spill-over into economic numbers, however, as trade links between Ukraine and CE3 are low. Polish exports and imports to/from Ukraine for example are only around 1% GDP. Hungarian and Czech trade with Ukraine is similarly low.

 What does this all mean for investment in the CE3?

The outlook for all three economies remains positive for 2022; the prospect of ongoing economic recovery bodes well. However, there is some nuance across the region, as well as specific risks to consider. For example, Hungary’s election could create some uncertainty, while in Poland tensions with the EU seem likely to persist.

For investors focused on the region, a thorough analysis of the stock opportunities on offer remains key in the Czech Republic and Hungary in particular. The number of investible stocks for the majority of institutional investors is lower relative to Poland, as well as other regional markets. In Poland, state-controlled companies also represent a reasonable share of the market, which is another issue to be mindful of.

In an emerging European context, we prefer Hungary. While politics may well create some uncertainty until the general election, the macroeconomic outlook is strong and there are some interesting stock opportunities. This is in contrast to the Czech Republic where despite a strong economic backdrop, stock opportunities are more limited, in part due to higher valuations. Poland too should see a strong rebound in activity, and valuations are attractive. However, compared with other regional markets, bottom-up stock opportunities are less attractive, particularly given a higher number of state-controlled companies.     


Rollo Roscow
Emerging Markets Fund Manager


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