AP News, January 31st, 2008
It took years for Andrzej Solyga to muster the courage to invest in mutual funds.
But in June 2007, at the urging of a friend, the Polish sculptor invested 200,000 zlotys ($82,000) in a fund that had been earning rich returns of 50 percent a year, joining a growing number of small investors in Europe's post-communist countries who finally succumbed to the lure of booming stock markets.
Solyga, 52, regrets his decision. Soon after he invested, the Polish stock market headed south, and by December he was so spooked that he sold everything at a loss of 50,000 zlotys ($20,000).
It's a phenomenon taking place throughout the world given the market tumult, but one felt acutely in eastern Europe, where retail investors are suffering jolting losses amid the global market dive fueled by the U.S. subprime mortgage crisis and fears of a recession there.
The recent downturn is the sharpest since the dot-com bubble burst in 2000, meaning this is the first real battering for most investors in the region, given that the number of people with mutual fund and stock holdings was still minuscule during the last shakeout.
And they are selling in droves.
On Wednesday, the WIG-20, the Warsaw Stock Exchange's blue-chip index, was down 23.5 percent from its peak on Oct. 29 — a fall more dramatic than that of the Standard & Poor's 500, which is down 14 percent from its peak during the same weak of October.
A fall of 20 percent or more is a rule of thumb for marking the beginning of a bear market.
The eight ex-communist countries that joined the EU in 2004 — Poland, Slovakia, Slovenia, the Czech Republic, Hungary and the Baltic states — have enjoyed strong economic growth over the past four years amid strong foreign investments spurred by membership.
Amid that climate, mutual fund companies have won ever larger numbers of investors with ads citing their high returns of the recent past.
In Poland alone, a country of 38 million, the number of mutual fund investors rose from 2.4 million to 3.3 million between the end of 2006 and September 2007, according to market research firm Analizy Online. About half of all investors started buying within the last two years alone, said Zbigniew Jagiello, chief executive of Pioneer Pekao TFI SA, Poland's biggest mutual fund company.
"For many, the greed was so strong that they decided to invest into pure equity funds, expecting at least 20 percent returns," Jagiello said, referring to mutual funds based solely on stocks.
"Now they are suffering the downturn and are disappointed, choosing to redeem their money."
He estimates that Poles have withdrawn 10 billion zloty ($4.1 billion) from local mutual funds in January amid the turmoil on stock markets, pushing the overall value of the sector's assets down to about 110 billion to 120 billion zlotys ($45 billion to $49 billion).
It's all quite a change from the days under communism, when most people were paid in cash and didn't even have bank accounts. Then, in the economically troubled early years after communism fell in 1989, most people simply struggled to get by and didn't have money to invest.
"We stepped into this market not so long ago," said Robert Wieckiewicz, a financial consultant with Premium Financial, a Polish brokerage house. "That's why people are so nervous. It's much more difficult for new investors to put their emotions aside."
Jagiello says that of all new EU members in the region, Poland's mutual fund market has suffered the most because the country is more exposed to equities than neighboring Hungary and the Czech Republic, where recent stock gains were more modest and where people have tended to opt for safer investments, such as bonds and other conservative investments.
"Polish investors have taken much higher risks in the past three years," he said.
But the drama has been felt everywhere. The Baltic benchmark index, which covers the stock markets in Estonia, Latvia and Lithuania, has fallen 28 percent since late July. Bankers say that citizens of the Baltic states had initially been slow to put their savings into the local stock market, preferring to invest in real estate instead.
"Panic has taken over," Bulgaria's economic daily Dnevnik wrote last week, with the national stock exchange indices down some 20 percent since the start of the year. "This is totally unfamiliar and uncharted territory in the bourse history of the country."
Some are vowing not to give up, however. Hristo Atanasov, a 59-year-old Bulgarian who works for a publishing company, invested 50,000 euros ($74,000) from an inheritance in local industrial and construction stocks last January only to see his entire profit from 2007 — 12,000 euros ($17,700) — disappear in the past few weeks.
But he plans to stay in the game. "The bad experience," he said, "has only taught me to be more careful while choosing where to invest my money."
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Associated Press writers Monika Scislowska in Warsaw, Poland; Veselin Toshkov in Sofia, Bulgaria; Gary Peach in Riga, Latvia; and Karel Janicek in Prague, Czech Republic, contributed to this report.
