DRESDEN, Germany -- A year ago investing in Eastern Europe was the craze. A flood of foreign capital moved into these emerging free-market economies and pushed stocks to euphoric levels.
Poland's stock market, for example, rose more than 800 percent in 1993. Hungary's market was up 200 percent in February of this year over a year earlier.
Then reality set in, with rising interest rates, profit-taking and a flight of capital from these risky, barely regulated markets.
Since March, investors have seen values plunge. Hungarian stocks are off 30 percent. Polish shares are down 57 percent from their March peaks, and the Czech stock market index has lost 35 percent.
It is a familiar pattern in many emerging markets around the world when they come into vogue. But a key question, speculation aside, is when do these markets offer value and good investment opportunities?
And how can an investor participate in a high-risk market like Russia or Slovakia without its being the equivalent of a crap shoot?
The answer may be that after the steep fall in the markets this year, values in Poland, Hungary and the Czech Republic are at reasonable levels -- but not bargains.
"Stocks are trading at about 10 to 15 times 1994 earnings, now that the speculative bubble of 1993 has burst, and that is not bad," said James Lister-Cheese of Independent Strategy, a London firm specializing in European markets.
While individual stocks, such as Zywiec, Poland's leading beer maker can be bought through brokers, investment advisers say the much preferred way of investing in Eastern Europe is through professionally managed funds.
The managers who supervise their funds frequently travel through the regions, looking at the local economies and talking with management. They can watch the markets much more closely than most individual investors, and the funds usually hold at least two dozen stocks or more, spreading the risk.
"There are great opportunities in Eastern Europe to make money and the managed fund is definitely the way to play it," said Rupert Lea, director of Barings' country fund department. "The funds that operate there will find much better investments than you or I could. And quite honestly, for a private individual to buy stocks in the market is a bit of a gamble."
Some investment advisers even recommend staying away from funds dedicated to individual countries, in favor of regional funds that invest in stocks of several countries, offering the investor a hedge against huge drops because of an isolated problem like political instability in one country.
Though investment in these funds is still relatively small, the handful of existing East European funds continues to expand.
Earlier this month, Barings Securities of London announced plans to sell another $75 million in shares in its East Europe Development Fund, which it established in 1990. This would bring its assets to $170 million.
Last week, Barings and S. G. Warburg announced the $160 million start of the first regional fund that invests in companies operating in the republics of the former Soviet Union. The fund is called First NIS Regional Fund, for new independent states.
While funds offer diversification, they do not protect against big swings.
For example, the Czech and Slovak investment Corp., a $54 million fund launched two years ago, which is managed by Robert Fleming Management, has fallen 30 percent this year. And the Baring Emerging Europe Trust is 30 percent off its February highs.
But the Central European Growth Fund, a $203 million fund managed by First Boston, waited to make most of its investments until May and June, once values had already plunged.
Thus, it has shown only a small drop this year. Its strategy is to invest 35 percent of the fund assets in the Czech Republic, 30 percent in Hungary and 30 percent in Poland.
Analysts say funds that invest in Russian stocks, such as the Russian Investment Fund, which was launched last December and is quoted on the Luxembourg Stock Exchange, are the riskiest since most stocks in Russia are traded over the counter and scams and corruption are widespread.
Though the holdings of the funds is diverse, many focus on the companies that are meeting the growing consumer demand.
The biggest holdings of the East Europe Development Fund are Zywiec and Okocim, two major Polish breweries, Sun Brewing Partners of Russia and Wedel in Poland, a cracker and cookie maker.
Julius Meinl International, an Austrian company operating the largest grocery chain in central Europe, is another favorite.
Lister-Cheese also notes that Fotex, a Hungarian retail chain, and Pick Szeged, a meat packer, are popular investments, as is CEZ, a major electric utility in the Czech Republic.