Global Investing

Time running out for Hungarian bonds?

Could Hungary’s run of good luck be about to end?

Despite controversial policies, things have gone the country’s way in recent months — the easing euro crisis and abundant global liquidity saw investors flock to high-yield emerging markets such as Hungary and also allowed it to tap international capital for a $3.25 billion bond. It has slashed interest rates seven times straight, cutting them this week to a record low 5.25 percent. The result is an increased reliance on international bond investors. Foreigners’ share of the Budapest bond market  is almost 50 percent, among the highest percentages in emerging markets.

But analysts at Unicredit write that both markets and economic data had validated rate cuts in 2012, which may not be the case any more. Annual headline inflation fell from 6.6% in September 2012 to 3.7% in January 2013 while the economy contracted 1.7% last year. As a result, net foreign buying of Hungarian bonds rose  in the second half of 2012 to 837 billion forints (an average daily rate of almost 6 billion forints), they note.  Markets are pricing at least 3 more cuts, that will take the rate to 4.5 percent.

But support from foreigners is ebbing. Since the beginning of the year, Unicredit points out, foreign investors have cut holdings of government bonds by 236.8 billion forints (average daily outflow of 6.1 billion forints). Moreover, the most recent rate cuts have failed to fully translate into bond yield corrections, they say.  While the short-dated 2-5 year segment of the curve dropped 23-40 basis points, the belly (the middle) of the curve dipped by only 9-24 bps and longer-dated yields over 10 years have risen by around 18 bps. And the fall in inflation too could be a thing of the past if the government resorts to tax hikes in order to meet the deficit target of 2.7% of GDP  — that would persuade the European Union to lift the excessive deficit procedure it has triggered against Hungary for repeated budget deficit overshoots.

The biggest complication could be the upcoming leadership change at the central bank, which is expected to tightly align monetary and government policies. That has contributed to the forint’s 1.5 percent weakening this year (after 11 percent gains in 2012) and many reckon portfolio flows could be seriously undermined.  Peter Attard Montalto, an economist at Nomura, calls outgoing governor Andras Simor “a level-headed defender of  financial stability, the currency, inflation and central bank independence even against unimaginable pressure from the government”. Montalto adds:

Foreign investors will find the institution much more closed and no longer the ‘safe haven’ for information and analysis. That may well be even more damaging in both the short and long run than any policy unorthodoxies.

Korea shocks with rate cut but will it work?

Emerging market investors may have got used to policy surprises from Turkey’s central bank but they don’t expect them from South Korea. Such are the times, however, that the normally staid Bank of Korea shocked investors this morning with an interest rate cut,  the first in three years.  Most analysts had expected it to stay on hold. But with the global economic outlook showing no sign of lightening, the BoK probably felt the need to try and stimulate sluggish domestic demand. (To read coverage of today’s rate cut see here).

So how much impact is the cut going to have?  I wrote yesterday about Brazil, where eight successive rate cuts have borne little fruit in terms of stimulating economic recovery. Korea’s outcome could be similar but the reasons are different. The rate cut should help Korea’s indebted household sector. But for an economy heavily reliant on exports,  lower interest rates are no panacea,  more a reassurance that, as other central banks from China to the ECB to Brazil  ease policy, the BoK is not sitting on its hands.

Nomura economist Young-Sun Kwon says:

We do not think that rate cuts will be enough to reverse the downturn in the Korean economy which is largely dependent on exports.

from MacroScope:

South Africa sovereign risk

MacroScope is pleased to post the following from guest blogger Peter Attard Montalto. Peter is emerging market economist at Nomura International and here outlines why he is cautiously constructive on the issue of sovereign risk in South Africa.

Recent events in South Africa have sent some conflicting signals to investors about sovereign risks. On the one hand there was some regulatory flip-flopping over the Vodacom listing given objections from the union organisation COSATU, which raised questions about the influence of unions in Jacob Zuma’s administration. On the other hand the sovereign issuing some $1.5 billion was highly successful and oversubscribed.

With Zuma recently elected on a platform of change for his domestic audience and continuation of old policies when speaking to investors, there is a raft of new ministers and new ministries and quite a bit of policy uncertainty. No foreign investor will deny South Africa’s need to address serious social problems of inequality, housing, jobs and education through a more developmental state agenda. However investors I speak to simply want to see that this is not at the expense of the productive sectors of the economy.

Exit Santa Claus, Enter the Grinch

Nomura Chief Economist David Resler has made it an annual tradition to write his year-end review and outlook set to the rhythm and rhyme of classic poem “A Visit from St. Nicholas”.

Better known by its first line “T’was the Night Before Christmas”, the 19th century poem is largely responsible for the popular conception of Santa Claus as a jolly, rotund, white-bearded man on a reindeer-pulled sleigh.

In keeping with the prevalent mood, Resler has this year substituted the merry figure of St. Nick with Dr Seuss’ Christmas-ruining, green-skinned Grinch who goes about “brewing up trouble” in the “housing price bubble” by posing as a
home mortgage lender:

Prudence and judgment the Grinch deemed simply passé
Neither income nor job would stand in his loans’ way.
For a Grinch-loan nothing had to be verified.
‘Cause in MBS bundles these risks would he hide.