The European Union accession countries are to continue their rapid growth this year as they converge with the existing members, according to Merrill Lynch Investment Managers. Despite 40.9% growth in the benchmark MSCI Emerging Europe index in 2003, Merrill Lynch says the sector is still undervalued and is set for further growth in 2004. ML Emerging Europe co-fund managers Alain Bourrier and Plamen Monovski say the three best markets are Poland, Hungary and the Czech Republic. The fund is 5.7% overweight the benchmark in Poland at 19.7%, and 1.2% overweight in the Czech Republic at 6.8%, although it is 2.3% behind the index in Hungary at 8.7%. However, the managers are favouring Polish mid-caps and Hungarian pharmaceutical company Richter Gedeon, which makes up 3.4% of the portfolio. All three of these central European economies were restructured during the 1990s and, although average GDP per capita is $6,000-9,000 compared with $30,000 in Germany, France and the UK, the economies are converging as they prepare for membership in May, Merrill Lynch says. Another seven countries – Estonia, Latvia, Lithuania, Slovakia, Slovenia, Cyprus and Malta – are also joining at this time. Bourrier says: “Emerging Europe has had excellent performance over the past couple of years but valuations are still low and the opportunities vast. Growth is set to continue, with the convergence story continuing to run for a number of years yet.” The ML Emerging Europe fund was up 47.1% in 2003. The managers said its top performer by country was Turkey, which rose 30% in the fourth quarter.