Stand: 31.05.2023
Market review In February global fixed income markets registered generally negative performances as rates in developed countries moved up. The economy seems more resilient than expected, obliging Central Banks to continue in their tightening policy. In CEE countries the trend was similar as inflation seems stickier than expected. In Czech Republic inflation printed a 17.5% from the previous 15.8% YoY. The Central Banks is expected to keep rates unchanged at 7% at the next meeting. In Poland CPI printed 17.2 from previous 16.6 % and local Central bank kept interest rates stable at 6.75. In Hungary, CPI printed 25.7% from 24.5% YoY and Central Bank kept rates unchanged at 13%, even if effective short-term rates continue to be at 18%. In Romania, the CPI printed at 15.7% from previous 16.37 % YTD. Local central bank kept rates at 7%. In the forex market the CEE currencies generally appreciated vs the Euro, with the Hungarian Forint gaining more than 4% vs Euro as the best performer in the area. The Czech Koruna gained nearly 2%. On the rate side the 3Y in Czech Republic decreased marginally from 5.44 to 5.35%, in Poland it increased from 6.12 to 6.31, in Hungary from 9.71 to 10.56% and in Romania from 7.18 to 7.30%. Portfolio activity In January we kept the duration below benchmark. We are now flat on duration in Hungary, Czech Republic, and Poland. We continue to be short in Romania in local currency while overweighting Romania in Euro. On the currency market we are long Hungarian Forint and Polish Zloty by 3%. We are short on Czech Korona by roughly 2%. We are still underweighting the Romanian Leu by roughly 3%. To hedge the good performance of the fund since the beginning of the year we created a long dollar position vs euro for roughly 5% to reduce volatility during period of risk-off. Outlook We continue to be constructive on local bonds of CEE countries. Nevertheless, we are short duration as recent downward move in yields was violent. This decision was more tactical than structural. On the longer term we are buyers of rates in the CEE area on weakness even it is difficult to spot the right entry point as inflation continues to be a problem for the region. Nevertheless, we are approaching interesting levels in the region and recent hikes in monetary rates should slow-down the economic cycle in the next future. On the currency market we prefer the Forint and Zloty compared to the Leu. We start to be bearish on the Czech Krona. Our overall stance on the government bonds of the area continues to be positive due to the high carry, fundamentals, and the political relevance of these countries, especially after Russian invasion of Ukraine.