Eye on Central and Eastern Europe: Four regions to look out for

Ken Orchard, manager of the T. Rowe Price Diversified Income Bond fund, and Rollo Roscow, emerging market equities fund manager at Schroders, outline the prospects for some of the major CEE economies.

Romania

"Romania has had a tumultuous time in recent years," Orchard said.

"The populist government overstimulated the economy between 2016 and 2018, leading to a spike in inflation that damaged investor confidence. More recently, though, inflation has peaked, and the government has shown signs it has shifted to a more responsible fiscal position."

He added that following 75 basis points (bps) of hikes last year, the central bank is unlikely to raise rates again in the near future if inflation remains under control – as he believes will be the case.

"Romanian bond yields have been stable so far this year and could follow eurozone rates lower, which is why we currently hold a long position in Romanian rates."

Roscow currently has no exposure to the country in their EMEA fund amid concerns over currency risk and tax threats.

He said: "In Romania specifically there are signs of hangover from an overheating of consumption demand in 2017/18 when GDP grew 7% and 4% respectively. The current account deficit has widened and the fiscal deficit is also pushing 3%.

"The currency is at risk of weakening further over and above euro weakness versus the dollar. We are concerned also of high tax risk on businesses due to poor fiscal planning by the government.

"We do not current have exposure to the country in our EMEA fund due to these concerns."

Serbia

Orchard said: "We began buying Serbian debt when its yields were in the double digits. The 10‑year yield is now down to 5.5%, but we think that Serbia's bonds still offer value.

"Inflation in the country is running at around 2.4% and has been fairly stable for the past few years, while the government has been running a primary fiscal surplus as it negotiates to join the EU."

He said a "nice mix" of solid macroeconomic fundamentals blended with sensible policymaking resembling Poland of 20 years ago was behind their exposure.

Poland

On Poland, Orchard said: "We currently have a short position on Polish rates. Gross domestic product (GDP) growth in the country has been strong at 5% and unemployment has been low, but wage growth and inflation have been held back, partly due to an influx of workers from Ukraine."

The manager said wages were beginning to rise again, which might signal rate rises down the line.

He added: "We do not necessarily think Polish rates will rise steeply, but if any central bank is going to be forced into hiking, it will probably be the National Bank of Poland.

"The market is pricing no changes in the policy rate over the next three years, so a short position on the country’s rates therefore makes sense as a hedge against our long positions on Romania and Serbia."

Roscow was positive on growth outlook for the nation, but flagged the uncertainty over its monetary policy and therefore was underweight the Polish market.

He said: "Poland has strong links with the eurozone, therefore a weaker eurozone will impact growth adversely but the domestic economy is well diversified and currently performing above trend.

"A delay in normalisation of ECB monetary policy could have a positive impact on Polish growth but the impact on stock market is negative as the market is dominated by financial stocks."

Czech Republic

Orchard said: "We have a long position on the Czech koruna versus the euro.

"The Czech Republic has been capacity‑constrained for a number of years and it was one of the first countries to begin hiking rates in the summer of 2017. This means short‑term rates are high compared with the rest of the region, delivering positive carry versus the euro."

The economy still lacks capacity, he said while inflation stood above target level.

The Czech Republic has a currency that looks undervalued by around 5%, with a rates differential with the ECB unlikely to diminish as the ECB becomes more concerned about eurozone growth.

"Indeed, the Czech National Bank (CNB) might hike a bit more, meaning the koruna may appreciate, hence our long position in the currency," he added.

Meanwhile Roscow added: "The country has an open economy with strong trade links with Germany. As mentioned, the CNB has already started hiking rates. We expect growth to slow down due to slower exports and due to the tightening cycle.

"We have more investment in Hungary, which has a more sustained growth path despite the trade balance surplus being almost extinguished by high consumption. We are overweight the country due to bottom-up stock reasons."