Go East, if you've got the nerve

It's the 80th anniversary of the Russian Revolution this week. But who cares, amid the stock market turbulence that has dented confidence in the new stock markets of Eastern Europe's fledgling capitalist states. However, the long-term outlook for these fragile economies still looks relatively promising.

Investors in former Soviet bloc countries have had a rocky ride since the fall of the Berlin Wall. But investing in such young economies means buying into the potential returns that can be achieved if they bloom successfully. With new stock markets opening up in Croatia, Estonia, Latvia, Lithuania and Macedonia, getting in now could result in handsome returns. That is what Michael Ashbridge, investment director at Save & Prosper, believes. "Eastern Europe is the world's most dynamic market," he claims.

The Russian market has been going through a period of remarkable returns, outperforming most others by up to three times. But this alone is not a sound reason to invest. Jeremy Podger, Guinness Flight's Eastern Europe expert, explains: "After the stellar performance of the last two years the larger Russian stocks are looking fairly fully valued. Bargains remain among the smaller companies, though there are information and trading liquidity problems."

Why are fund managers keen on what is after all a very risky market? Mr Ashbridge says: "Investors prepared to take on the extra short-term volatility should be able to look forward to significantly above average returns over the longer term."

According to Mr Ashbridge, there are good reasons to invest in Eastern Europe now. Economic conditions are ideal for growth with inflation falling, growing consumer activity, increasingly stable economic management and massive underdeveloped natural resources. Political changes are helping to rekindle entrepreneurial spirit, though there is instability. With capitalism, however, has come corruption. Inefficiency is endemic, partly due to inexperience. The free market economy will undoubtedly drive many former state-owned industries to the wall.

The picture, then, is one of opportunity but very high risks. Good profits may be made, but back the wrong horse in the wrong race and you will be counting the cost.