Bear Stearns upgraded the Czech Republic to market weight from underweight and kept its market weight allocation for Poland, citing the two countries' reform momentum, while Hungary was downgraded to underweight from market weight on rising inflation and reform setbacks, reported marketwatch.com.

„In the Czech Republic, growth is strong but decelerating, the current account deficit is rising, and budget discipline is weak,” said Marianna Kozintseva, emerging markets analyst at Bear Stearns, in a Tuesday research note. „However, the government has finally recognized the budget deficit as a problem and approved a fiscal reform package.” The Czech market also benefits from strong earnings estimates for 2007 and 2008, and as a result, was upgraded to market weight. „In the last few weeks, the three regional markets have fully recovered from the February slump and are trading above May 2006 levels,” Kozintseva said. From a portfolio perspective, Poland, the Czech Republic and Hungary are not cheap, she added. Two factors guide Bear Stearns' assessment of Central Europe: economic growth driven by European Union membership as well as the speed of structural reforms motivated by demands for Eurozone accession, Kozintseva said. Bear Stearns' preferred Central European stocks are in the banking, real estate, retail and entertainment sector.

In Poland, the focus list includes clothing retailer LPP, Globe Trade Center, a developer of office buildings, shopping centers and residential properties, and Cinema City International, the largest operator of multiplex cinemas in Central and Eastern Europe. In the Czech Republic, Bear Stearns likes Orco Property Group, a major developer of residential and office projects in Central Europe, as well as Central European Media Enterprises operator of the leading television group in Central and Eastern Europe. In Hungary, Bear Stearns likes OTP Bank the country's leading commercial bank. The Czech Republic, together with Poland, Hungary and seven other Central and Eastern European countries, joined the EU in 2004.

„Poland remains the region's fastest-growing economy, driven largely by domestic consumption and investment,” Kozintseva said. „While the government is wobbly, it has moved in the right direction by proposing major public finance reform.” Poland has a population of 40 million, which gives it enormous economic and business potential. The Warsaw stock market is the biggest and most liquid in Central Europe. It has outperformed other regional markets, boosted by a strong domestic investor base and solid economic growth. „In the Polish market, we still see potential in the banking sector; however, investors should carefully pick their bet,” said Jaroslaw Orlinski and Dariusz Koczar, Poland-based analysts at the Riedel Research Group. They recommended commercial bank ING Bank Slaski on expectations of acceleration in the corporate sector to which ING has significant exposure. „Due to incredible boom in the real estate market in Poland, significantly improved mortgage conditions and finally dwellings deficit of over 1 million units, we recommend buying Dom Development shares, a leading residential developer in the capital Warsaw,” they said. Orlinski and Koczar are also very positive on Agora, whose flagship business is Gazeta Wyborcza, one of the major Polish daily newspapers. At the end of March, Standard & Poor's hiked Poland's long-term foreign-currency credit rating to A- from BBB+ with a stable outlook, citing the country's strong and balanced growth prospects, but cautioning that political instability continues to constrain ratings.

„Hungary is the region's structural reforms leader, but growth and consumption remain low, and inflation has emerged as a major challenge,” Kozintseva of Bear Stearns said. „The government also faces some reform setbacks.” As a result, Bear Stearns downgraded Hungary to underweight. Fiscal disaster, caused by excessive public borrowing and current-account deficits, has plagued the Hungarian economy. As a result, the currency, the forint, is vulnerable to fluctuation, making it riskier for investors to own forint-denominated assets. Inflationary pressures are also rising. The government of Prime Minister Ferenc Gyurcsány has introduced fiscal tightening measures to rein in the budget deficit, which will dampen growth significantly. The Economist Intelligence Unit is expecting real GDP growth to decline to 2.6% in 2007 and then edge up to 3% in 2008. The economy grew about 4% last year. „The government also faces some setbacks following the February decision by the Constitutional Court to annul the introduction of the expected corporate tax and the April resignation of the Minister of Health Lajor Molnár,” Kozintseva said. „Both growth and consumption remain relatively low, though they may rebound in 2008-2009 after the effects of reform are felt.”