The first is value investment, when investors first discover an economy. Resources may be cheap, but there is a high political risk that reforms may not come through in the near future and a large potential for macroeconomic shocks, including inflation and trade deficits. As those risks diminish and if reformers stay in power, stocks become attractive. Substantial amounts of foreign capital flow into the countries, and the markets begin to perform well. For those who know what to look for, it can be the ideal season for stock hunting.
Earnings growth is usually the key.
This takes time to deliver. Until the whole process is well under way, there is rarely any visible earnings growth, largely because there are no profits. Mr. Butchart said Hungary had reached phase three, largely with the help of foreign direct and strategic investors, who own large stakes in most of the active issues on the Budapest Stock Exchange. Russia is toward the end of phase one, with its equities approaching fair value and, with little restructuring under way, especially in the large energy-sector stocks, little growth in sight. Poland is near the end of phase two.