RPT-East European markets expected to bend not break

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By Matthew Tostevin

LONDON, March 1 (Reuters) - Stock markets in parts of east and central Europe looked due for a correction even before the latest global turmoil and could suffer further losses despite good long-term prospects, regional financial analysts say.

Regional bourses had enjoyed a strong run up since mid-2006, with valuations lifted by the hopes of foreign and local investors in economies spurred by closer integration with the European Union.

The question now is will the region weather the global turbulence and stem its losses or fall much further?

"I definitely do not expect a lot of new money charging into the market. From a liquidity perspective people will stay cautious," said Matthias Siller, investment manager for Barings Asset Management in London.

"In the end. I think the value character of the markets that we are talking about will resurface and will attract global liquidity flows again."

Financial markets were sent into a tailspin this week due to tumbling Chinese stocks, unease over the U.S. economy and worries about Iran.

The MSCI Eastern Europe stock index fell 4.47 percent by 1445 GMT on Thursday, bringing the total loss to over 9.00 percent this week.

The week's fall in the region compared to a drop of 6.93 percent in the MSCI global emerging markets index and 6.26 percent in the FTSEurofirst 300 index of top European shares.

Austria's Raiffeisen, one of the leading western banks in the region, expects a total correction of about 15 percent in central and east European stock markets in coming months whether or not they bounce back from this week's sudden drop.

Peter Brezinschek, Raiffeisen's top strategist, said this week's dip could signal the start of the bigger correction it had expected to play out over the next two to three months.

"In total, it might be a correction of 15 percent on average," Brezinschek told Reuters on Wednesday.

"That is smaller than it was last year, when it was more than 20 percent," he said, referring to a sell-off of April and May of 2006 that some now see as a seasonal phenomenon.

Barings' Siller also said a fall of 10 to 15 percent in east and central Europe might be expected, although he said he did not see a bubble in regional markets.

CAUTION

The degree of a correction could be fairly localised, analysts say, with valuations in some countries and sectors seen as more out of line than others.

Agne Zitkute of Pictet Asset Management highlighted Poland and particularly its banks as being vulnerable.

"These valuations are not justified so at the moment the market is being supported by the local investment funds, which are still buying," she said.

"If they stopped buying for any reason, if risk aversion rose and affected them as well, Poland is the most obvious bubble to me. But then if you move on into Czech Republic and Hungary, I wouldn't necessarily agree those markets are due for massive corrections."

In the longer term, analysts are generally bullish.

Siller, from Barings, said dips in the coming months would be buying opportunities.

Raiffeisen forecasts annual GDP (gross domestic product) growth of 4.5 to 5.5 percent over five years for central Europe -- Poland, Czech Republic, Slovakia, Hungary and Slovenia -- and 4.75 to 6.0 percent for south eastern Europe, including Bulgaria, Romania, Serbia, Croatia and Bosnia.

"We expect it to continue to be the second best region for growth after China and India," Brezinschek said. ((Editing by Leslie Gevirtz; Reuters messaging: matthew.tostevin.reuters.com@reuters.net))

Keywords: MARKETS EASTEUROPE