While bond managers everywhere fret about the impact of rising global inflation, price rises could actually slow in Hungary following a series of restrictive government measures, creating the ideal environment for fixed interest investing.
England-based Investec Asset Management is planning to take advantage of this through its Emerging Markets Debt fund, which has its largest weighting in Hungary at 12%. The manager of the £24 million ($48.8 million) fund, Peter Eerdmans, believes that countries with strong currencies, falling inflation and good balance of payments present a benign environment for bond investors. The Hungarian market hit a bottom last year when the country built up a high fiscal deficit and was penalized by investors after it suffered a big currency sell-off. This led to the authorities stepping in to ratchet up interest rates, cut state spending and raise taxes. Eerdmans said: “As a result, the economy has slowed down while the rest of Eastern Europe is seeing their economies grow. As Hungary is slowing down, therefore inflation will slow and this allows us to play the short-end of the yield curve.”
Other countries where governments have introduced restrictive policies, include Turkey and Brazil, where the fund has a 10% and 11.5% weighting respectively. The fund is also overweight in Egypt where inflation is dropping and is expected to hit single digits soon. One way the Egyptian government is expected to do this is through the introduction of a flexible exchange rate. The fund uses a quaint screen based on a series of fundamental risk indicators, called FRISKI, which analyses exports growth, reserves of money supply, external debt, foreign direct investment of GDP and the real effect of exchange rates. (citywire.co.uk)