Central Europe stocks, bonds and currencies weather the Brazil storm
What could have been a week of anguish for the financial markets of emerging Europe turned into a rather blase affair. The fallout from the Brazil devaluation bomb was noticable, but more noticable, perhaps, is that business in Budapest, Prague and Warsaw is proceeding as usual.
Hungary is a case in point. In Budapest, last Wednesday started out looking like Russian crisis deja vu. An emerging market in another time zone devalued its currency and announced a debt moratorium, sending bond yields in Hungary soaring and stock prices plummeting.
The worst hit in Central Europe, Hungary's benchmark BUX index fell 9.8% on Wednesday, when Brazil announced its devaluation, the biggest one-day drop of the BUX since the height of last fall's Russian crisis. Foreign capital in Budapest is said to account for about 70% of the bourse's total capitalization.
But then something different happened.
The next day, investors debunked conventional wisdom that Brazil's crisis would eat away at Hungary's stability, and instead flocked to a new 10-year government bond, the first for Central and Eastern Europe.
"We are very happy," said Laszlo Borbely, deputy director at the State Debt Management Agency (AKK). He had expected investors, fearing Brazil's problems would lead to another Russian-style emerging markets crisis, to demand higher yields.
"The market was more optimistic than we were. Before, we couldn't know what the investors would think about the connection between Hungary and Brazil," said Borbely.
The issue was well oversubscribed, as investors submitted bids worth more than Ft 61 billion ($279 million) when the state only said it was selling Ft 10 billion ($45 million) of debt. In the end, slightly more than Ft 12 billion in bonds was issued.
The bonds pay a fixed interest rate of 9.5%, doled out twice a year. The average selling price was 99.39% of face value.
In Prague, equity shares on the Prague Stock Exchange were dragged down last week by the Brazil crisis, led by telecom monopoly SPT Telecom, the bourse's most highly capitalized issue.
"Everything that happened last week was influenced by the situation in Brazil," said Ales Skala of Prague Securities.
The PX-50 index full 7.31% on the week, closing on Friday at 383.
"A couple of macro figures were released during the week, but nobody paid much attention to them," said Ivan Klusacek of Raiffeissen Capital & Investments.
"Normally, this kind of news would have had some effect on the share price," said Klusacek. "But everybody was too busy watching world markets to take notice."
Yet by Monday, markets were calm as traders waited for U.S. markets to set the tone. American traders had the day off because of Martin Luther King Day, a national holiday. Shares in Prague closed up 3%, regaining a good portion of the ground it has lost during the Brazil panic, Reuters reported.
And although Poland, the region's largest economy, is still perceived as an emerging market, last week proved that it is becoming less sensitive to financial disturbances in other transitional economies.
The Polish currency, the zloty, followed the same path it had during both the Asian and Russian crises - it slumped and then bounced back quickly.
"We tend to forget about the nominal devaluation," said Pierre Bergeron, head of economic and financial research at Citibank (Poland).
That doesn't mean, however, that the zloty will not be affected by developments on other world markets, he added. "But that's because the Polish economy is more and more linked with international financial markets, not because it's an 'emerging' market," Bergeron said.
"By the way, I don't like the word (emerging)," Bergeron added, a comment characteristic of investor's changing attitudes toward the region.
Analysts also said that the zloty was simply overvalued before the Brazilian quake, and that now it has returned to a more normal level. While the zloty started off the week depressed as a result of the world's worry that Brazil would devalue its currency, the real, by week's end the zloty had stabilized.
Brazil's central bank last Wednesday announced that it would devalue the real by about 8%. The move followed an international confidence crisis in the country that was sparked by a province governor declaring a 90-day moratorium on debt repayments to the central government.
Some investors in Central Europe hardly even noticed. One foreign fund manager investing in the Hungarian debt issue said he was not even concerned about events in Brazil, for example.
"Seeing how much interest there is for the bond, the difference will be small," said Volker Wherle, manager of the 120 million Vontobel East European Bond Fund in Zurich,
Events in Brazil had little impact on yields, he said. "It's the only long bond in the region, and the economic situation [in Hungary] is quite promising."
Wherle said he bid for about Ft 1 billion ($4.7 million), or 10%, of the total amount of debt on offer. "We would be happy to get any at all," he said.
Yet others, knowing Central Europe is still seen as 'emerging' by some, are more cautious.
"It's not a favorable environment for a new issue, especially for this, which is the first for Central and Eastern Europe," said Csaba Ludanyi, head of fixed-income research at CA IB Securities Rt in Budapest.
Ludanyi said the Brazilian crisis was expected to drive yields on Hungarian bonds to more than 10%, while prior to the developments in Brazil the market was expecting considerably lower yields - in the 8.75%-9% range.
The average yields after the government long bond auction stood at 9.82%.
Subsequent auctions of the bonds - which the government plans to hold once a quarter - could be less successful should the situation in Latin America deteriorate, admitted Vontobel's Wherle.
The Brazilian crisis is not likely to lead to a huge outflow of foreign capital from Hungary, said Luca Parmeggiani, who manages a portfolio of around $250 million in Eastern European equities for Vontobel in Zurich.
"I would expect it's not so bad for Eastern Europe, especially when I think of Poland and Hungary. The link between Latin America and Eastern Europe is weak. That is the rational way to think," said Parmeggiani.
But Parmeggiani added that markets don't always act rationally and did not discount further falls in local equity prices if Brazil sparks a general paranoia toward global emerging markets.
Hungary is a case in point. In Budapest, last Wednesday started out looking like Russian crisis deja vu. An emerging market in another time zone devalued its currency and announced a debt moratorium, sending bond yields in Hungary soaring and stock prices plummeting.
The worst hit in Central Europe, Hungary's benchmark BUX index fell 9.8% on Wednesday, when Brazil announced its devaluation, the biggest one-day drop of the BUX since the height of last fall's Russian crisis. Foreign capital in Budapest is said to account for about 70% of the bourse's total capitalization.
But then something different happened.
The next day, investors debunked conventional wisdom that Brazil's crisis would eat away at Hungary's stability, and instead flocked to a new 10-year government bond, the first for Central and Eastern Europe.
"We are very happy," said Laszlo Borbely, deputy director at the State Debt Management Agency (AKK). He had expected investors, fearing Brazil's problems would lead to another Russian-style emerging markets crisis, to demand higher yields.
"The market was more optimistic than we were. Before, we couldn't know what the investors would think about the connection between Hungary and Brazil," said Borbely.
The issue was well oversubscribed, as investors submitted bids worth more than Ft 61 billion ($279 million) when the state only said it was selling Ft 10 billion ($45 million) of debt. In the end, slightly more than Ft 12 billion in bonds was issued.
The bonds pay a fixed interest rate of 9.5%, doled out twice a year. The average selling price was 99.39% of face value.
In Prague, equity shares on the Prague Stock Exchange were dragged down last week by the Brazil crisis, led by telecom monopoly SPT Telecom, the bourse's most highly capitalized issue.
"Everything that happened last week was influenced by the situation in Brazil," said Ales Skala of Prague Securities.
The PX-50 index full 7.31% on the week, closing on Friday at 383.
"A couple of macro figures were released during the week, but nobody paid much attention to them," said Ivan Klusacek of Raiffeissen Capital & Investments.
"Normally, this kind of news would have had some effect on the share price," said Klusacek. "But everybody was too busy watching world markets to take notice."
Yet by Monday, markets were calm as traders waited for U.S. markets to set the tone. American traders had the day off because of Martin Luther King Day, a national holiday. Shares in Prague closed up 3%, regaining a good portion of the ground it has lost during the Brazil panic, Reuters reported.
And although Poland, the region's largest economy, is still perceived as an emerging market, last week proved that it is becoming less sensitive to financial disturbances in other transitional economies.
The Polish currency, the zloty, followed the same path it had during both the Asian and Russian crises - it slumped and then bounced back quickly.
"We tend to forget about the nominal devaluation," said Pierre Bergeron, head of economic and financial research at Citibank (Poland).
That doesn't mean, however, that the zloty will not be affected by developments on other world markets, he added. "But that's because the Polish economy is more and more linked with international financial markets, not because it's an 'emerging' market," Bergeron said.
"By the way, I don't like the word (emerging)," Bergeron added, a comment characteristic of investor's changing attitudes toward the region.
Analysts also said that the zloty was simply overvalued before the Brazilian quake, and that now it has returned to a more normal level. While the zloty started off the week depressed as a result of the world's worry that Brazil would devalue its currency, the real, by week's end the zloty had stabilized.
Brazil's central bank last Wednesday announced that it would devalue the real by about 8%. The move followed an international confidence crisis in the country that was sparked by a province governor declaring a 90-day moratorium on debt repayments to the central government.
Some investors in Central Europe hardly even noticed. One foreign fund manager investing in the Hungarian debt issue said he was not even concerned about events in Brazil, for example.
"Seeing how much interest there is for the bond, the difference will be small," said Volker Wherle, manager of the 120 million Vontobel East European Bond Fund in Zurich,
Events in Brazil had little impact on yields, he said. "It's the only long bond in the region, and the economic situation [in Hungary] is quite promising."
Wherle said he bid for about Ft 1 billion ($4.7 million), or 10%, of the total amount of debt on offer. "We would be happy to get any at all," he said.
Yet others, knowing Central Europe is still seen as 'emerging' by some, are more cautious.
"It's not a favorable environment for a new issue, especially for this, which is the first for Central and Eastern Europe," said Csaba Ludanyi, head of fixed-income research at CA IB Securities Rt in Budapest.
Ludanyi said the Brazilian crisis was expected to drive yields on Hungarian bonds to more than 10%, while prior to the developments in Brazil the market was expecting considerably lower yields - in the 8.75%-9% range.
The average yields after the government long bond auction stood at 9.82%.
Subsequent auctions of the bonds - which the government plans to hold once a quarter - could be less successful should the situation in Latin America deteriorate, admitted Vontobel's Wherle.
The Brazilian crisis is not likely to lead to a huge outflow of foreign capital from Hungary, said Luca Parmeggiani, who manages a portfolio of around $250 million in Eastern European equities for Vontobel in Zurich.
"I would expect it's not so bad for Eastern Europe, especially when I think of Poland and Hungary. The link between Latin America and Eastern Europe is weak. That is the rational way to think," said Parmeggiani.
But Parmeggiani added that markets don't always act rationally and did not discount further falls in local equity prices if Brazil sparks a general paranoia toward global emerging markets.
