The controversial move, made in early October, comes after years of wrangling between member states over whether Turkey was suitable for inclusion. The final decision could take another 10 years, but there is now renewedinterest inemerging Europe as a lucrative investment market.
Many fund managers insist that economic liberalisation, convergence with Western Europe and rising commodity prices offer prospects; other financial advisers say the easy money has already been made.
We spoke to leading investment houses and IFAs about how people should invest and commit money there, and which countries looked attractive.
Emerging Europe is, broadly speaking, the former Eastern Bloc countries such as Poland and Estonia, many of which joined the EU in May 2004. Bulgaria and Romania are due to join in 2007, and have been carrying out the necessary political and social reforms to meet entry requirements.
Alain Bourrier of Merrill Lynch, who co-manages the MLIIF Emerging Europe fund, says convergence countries such as Hungary, Poland and the Czech Republic have grown at double the rate of their Western European counterparts, having benefited from lower taxes and cheap labour.
"Emerging Europe offers an interesting opportunity that cannot be found elsewhere," he explains. "We hold positions intelecoms companies and banks that enjoy significant catch-up potential. The opportunity for growth in the banking sector is particularly extensive, as between 90 and 95 per cent of people don't have mortgages."
This view is shared by Liesbeth Rubinstein, head of Emerging Europe, Middle East and African equities at Schroders. Companies have become more competitive and have enjoyed funding from richer countries, she explains, which has allowed them to grow faster. "We are looking for faster growth and improving corporate profitability at a discount to developed markets," she adds.
Global emerging markets, including emerging Europe, has been the number one ranked sector, with a return of 35.53 per cent over the past year to 21 October 2005, according to data compiled by Lipper.
This trend is expected to continue. Robin Geffen, managing director and chief investment officer at Neptune Investment Management, predicts that mostgrowth will come from these areas in 2006.
"At the front of the queue would be Russia, which benefits from a strong oil price," he says. "It also has excellent domestic supplies of strategic metals and a growing middle class whose future savings will underpin the stock market."
Investing in emerging Europe also means getting to grips with alien companies. Among the stocks favoured by investment houses is the Hungarian oil refiner MOL Magyar.
"Demand for oil is good and the company's valuation is cheap," said one fund manager. "It will deliver good margins for longer than the market anticipates, because there are big barriers to entry within this sector. It takes three years and about $2.5bn (£1.4bn) to build a new refinery."
Hungary's OTP Bank is also popular. "It has arguably better corporate-governance procedures than Swiss banks," says one portfolio manager. "This is in contrast to the average Russian company, which doesn't want to improve its relationship with minority shareholders."
However, Darius McDermott, managing director of Chelsea Financial Services, is more cautious. "A lot of Eastern European markets were undervalued four or five years ago, but the easy money has been made," he says. "There are good companies, but it's only suitable for a maximum of 5 per cent of a high-risk investor's portfolio." Enthusiasm for emerging Europe has also been driven by low interest rates, particularly in the US, where they fell to 1 per cent.
But would people be willing to take risks if they could earn 5 per cent in a safe deposit account? It's likely that money would be withdrawn, which would hit the value of investments.
Barry Norris, manager of the Britannic Argonaut European Alpha fund, acknowledges both arguments. The upside is exposure to well-run companies at cheap valuations; the downside is the increased possibility of losing money. "There are opportunities," he says. "But we are selective in the stocks we choose. It's a very volatile market for retail investors. It offers faster growth than Western Europe, but comes with higher risks."
Hungary, he adds, is attractive because it has an impressive rate of economic growth. Exposure to emerging Europe could be worthwhile, but only with money that investors can afford to lose. "Investors should buy when the market dips rather than when it has risen," adds Norris.
Ben Yearsley, investment manager at Hargreaves Lansdown, says: "Investors should buy a fund. Buying a single company is risky, especially in an emerging market." There are three types of fund worth considering, he adds. For people who want hefty exposure to the region, there are dedicated portfolios. A Global Emerging Markets fund - which adds countries such as Brazil - may offer a more diversified portfolio, while some basic European funds also have exposure to emerging countries.
According to Guy de Blonay, manager of the New Star Global Financials fund, there is potential in the period leading up to EU membership, with Turkey a prime example. Stocks such as Garanti Bank, he suggests, are likely to be among the main beneficiaries of a changing Turkey, which is expected to enjoy a mortgage industry boom within the next couple of years.
"Turkish equity markets and its currency rallied on the back of news about the talks, although the euphoria may be tempered in the coming months because membership is at least a decade away," he says. "However, it will help improve the country's image as a destination for foreign investments, and possibly tourism."
Funds recommended by independent advisers
Jupiter Emerging European
The objective of the fund is to achieve long-term capital growth through investment primarily in Central and Eastern European areas such as Russia and the Baltic States. It is ranked the number one fund in the Global Emerging Markets sector over the past three years, with a return of 215.4 per cent up to 17 October, 2005, according to the ratings agency Standard & Poor's.
Credit Suisse European Frontiers
The fund aims to achieve long-term capital growth and has a policy of investing in developing countries, principally the Czech Republic, Hungary, Poland, Russia and Turkey. It has achieved a return of 204.1 per cent over the past three years, compared to the 136.4 per cent average for the Global Emerging Markets sector up to 17 October, 2005.
New Star Global Financials
This fund invests all over the world, but has a sizeable chunk of its portfolio invested in emerging Europe. The manager focuses on financial companies such as banks, which are tipped to be big winners as emerging European markets catch up with the West.