(Adds Czech Republic, Croatia from seventh paragraph.)
Oct. 5 (Bloomberg) -- Hungarian bonds and stocks are poised to underperform regional peers as the European Union’s most- indebted eastern member risks a credit downgrade and fiscal austerity hurts the economy, Raiffeisen Research said.
Investors should be underweight government bonds of Hungary and Romania and equities in Hungary and Poland, analysts at the unit of Austria’s Raiffeisen Bank International AG said in a quarterly report today. They have an overweight recommendation on Czech bonds and stocks, Turkish debt and Croatian equities.
Hungary, which received an international bailout in 2008, is raising taxes and cutting spending to trim the 2012 budget deficit to 2.5 percent of gross domestic product as the economy slows. Moody’s Investors Service, which rates Hungary Baa3, the lowest investment grade, said last week that a new law allowing repayment of foreign-currency mortgages at fixed exchange rates, with banks absorbing losses, sets a “worrying precedent.”
“Due to the economic slowdown and rising political uncertainty, there are fiscal-policy risks which could result in the country being downgraded to a junk rating,” the analysts said. “The austerity measures of the Hungarian government will result in stagnation in GDP. Consequently, we also lower our investment in Hungarian shares.”
Hungarian bonds have tumbled as the forint weakened to a 2 1/2-year low, fuelling speculation the central bank will lift rates to support the currency. The debt selloff has lifted the yield on benchmark 2017 notes to 7.77 percent at 5:20 p.m. in Budapest from a low of 6.53 percent on Sept. 8.
The cost of insuring the debt jumped to the highest since March 2009 after the government said two days ago it wants to restructure 180 billion forint ($803 million) of debt amassed by local administrations. Credit-default swaps, which increase as creditworthiness worsens, jumped to 573 basis points today from 510 points a week ago and 268 three months ago, CMA data show.
Czech bonds and stocks are set to outperform as investors view the country as a regional safe haven and companies “enjoy a fundamentally sound footing,” Raiffeisen wrote. “The two- notch upgrade of the Czech credit rating should continue to have a positive effect on prices of Czech government bonds” and “we overweight Czech shares because we expect that their dividend yields will be quite high.”
Croatia’s planned EU membership from July 2013 is set to buoy economic growth and support equities, according to the Raiffeisen report. Turkish bonds will benefit from an expected interest-rate cut and a lower risk of contagion from the euro area’s government-debt crisis than for other countries in central and eastern Europe, the analysts said.
--Editors: Linda Shen, Peter Branton
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