No blues on the Danube

Anyone who has ever visited Budapest will know that the Danube flows not blue there, as promised in song, but muddy brown. A market commentary released this morning by Raiffeisen Capital Management (RCM) suggests Budapest has banished the blues in other ways too.

News of Hungary’s economic demise have been greatly exaggerated, says the Austrian specialist in Central & Eastern Europe (CEE), and Hungary remains a promising emerging market for investors.

While Hungary, like other nations in Europe, is facing public-finance difficulties, it is far from going the down the same route as Greece, says RCM. The problem is the Hungarian government has rather “talked up” its own problems.

“The new Hungarian government showed Europe how not to communicate internal budget problems,” explains Zoltan Koch, a fund manager with RCM’s Vienna-based emerging-markets team.“The exaggerated depictions of Hungary’s public finance woes were driven by internal political motives, and the comparison with Greece brought Hungary into disrepute and tarnished the country’s image among international investors.”

In fact, if not exactly hunky-dory, things are under control in Hungary, says RCM. Strict budget requirements from the International Monetary Fund (IMF) for 2010 and 2011 have been approved, the aid package agreed in November 2008 with the IMF, EU and World Bank is still intact, and Hungary has an emergency EU/IMF funding facility worth €750bn to fall back on. Hungary is still able to raise funds on the bond market, and the premiums on government bonds are currently moderate. Furthermore, the 80% of Hungary’s companies that are export-oriented are benefiting from a weak forint, and the result that positive trade and payment balances are helping Hungary to service its debt relatively well.

Like cleaning up the Danube, it’s a long game, however. In the short term, choppy waters on the stock market will create problems for investors. “Right now, there is no sector that is only profiting from the recent developments and that is valued attractively. As expected, bank paper has been hit especially hard,” says Koch.

However, he remains confident that the medium and long-term prospects for the Hungarian market are good, and his colleague from the bond team, Ronald Schneider is also upbeat.

“The conditions are good for bond investments in any case because there is virtually no inflationary pressure,” he says. “If the forint remains stable or appreciates slightly, the national bank could cut its key interest rate. This would support the bond markets. The currency and government bonds (yields of 7% and higher) will remain attractive over the long term.”

Fiona Rintoul, Editorial Director
©2010 funds europe



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