EMD stars clash on Hungarian government bonds

Investment management firms’ EMD heads at odds after country sees bonds downgraded to junk status.

The heads of emerging market debt at Investec and Aberdeen are at odds on Hungarian government debt after the country saw its bonds downgraded to junk status last week. 

Investec’s Peter Eerdmans is poised to up his stake in the bonds on IMF intervention, while Aberdeen’s Brett Diment has sold out of the asset class as the troubled Eastern European country turns to international bodies for support.

Last week the Hungarian government requested financial aid from the IMF and the EU on growing debt and weakening currency fears.

Moody’s downgraded Hungary’s debt one notch to junk status shortly afterwards, although S&P and Fitch have so far kept the country’s debt at the lowest investment grade level.

Yields on five-year Hungarian government bonds then rose to their highest level since February this year, at 9.87%, while the forint lost 1.6% to 316.43 against the euro.

Eerdmans said positive signals the IMF and EC will help Hungary would prompt him to add to short- to medium-dated Hungarian debt despite the downgrade.

However, Diment remains cautious on the bonds after reversing his position in the region earlier this year on economic fears.

“We first bought into Hungarian bonds in mid-2009, but sold out earlier this year when the country’s economic conditions started to deteriorate,” said Diment.

“This was because valuations were less attractive and the market had already done well. We were also concerned about how contagion risk from the key eurozone countries would impact Hungary’s economy.”

Bond investors have long been cautious on Hungary, which was badly damaged post-Lehman, and has been subject to a series of high risk and unorthodox policy actions by its government.

Hungarian debt has recently sold off aggressively, with the yield of the J.P. Morgan GBI-EM Hungary index reaching a yearly high of over 8% in early November, tempting some emerging market debt investors back in.

Eerdmans is poised to add to his neutral exposure to the asset class as he sees valuations as attractive.

“It is too early to draw concrete conclusions about the long-term implications of government policies, but it is clear they have raised uncertainty amid a turbulent economic environment, leading to an increase in the risk premium required by investors to own Hungarian government debt,” said Eerdmans.

“Help from the EU and IMF could lead to the removal of some substantial risks (mainly liquidity risks, high refinancing needs and excess currency weakness), which could open the door to excellent future returns consistent with the economy’s improving fundamentals.”

However, he added if Hungary fails to broker a deal with the IMF, he would sell out of the bonds completely.

Diment said he expects Hungary will struggle to get IMF support and remains wary on the outlook for its economy.

He is also steering clear of Eastern European government debt as a whole on contagion fears, and is underweight Poland, Hungary and the Czech Republic. He has recently upped his exposure to Mexico to 15% on positive growth figures coupled with depressed wage inflation.

“Strong growth combined with a decline in wage growth equals a low level of inflation, which is good for Mexican currency bonds,” he added.

Eerdmans is also cautious on Eastern Europe and favours Asia and South Africa because of their strong fundamentals compared to elsewhere in the world.