Eastern European markets offer investors the chance to benefit from a convergence play on their futu...
Eastern European markets offer investors the chance to benefit from a convergence play on their future membership of the European Union (EU).
It has become an increasingly attractive market as some countries draw closer to joining the single market, according to many fund managers.
Paul Murray-John, executive director of emerging markets fixed income at Threadneedle, says: 'It really does not matter how their economies have performed, what matters is their political moves towards Europe.'
He makes a distinction between local currency and euro, sterling or dollar denominated currency bonds. Local currency bonds tend to be short duration, two to three years, while hard currency bonds are long duration, 10-15 years, he says. Because of this, hard currency bonds are more sensitive to global changes in interest rates.
The main problem that could face investors in Eastern European government bonds would be lack of political willingness by EU member states to admit new entrants.
Murray-John says: 'Spain has the biggest bugbear about EU enlargement because it is one of the biggest beneficiaries of the EU budget at the moment.'
He believes here are very few opportunities for investors looking for corporate paper.
'With privatisation in Eastern Europe, companies have been bought by strategic investors in western Europe and the US ' large corporations rather than smaller investors that might need debt finance,' Murray-John says.
According to Thierry Moulin, bond fund manager at SG Asset Management, the best-performing period for Eastern European government bonds was last year, particularly for Poland.
Low interest rates in Poland, which fell from 11% to 3.5% last year, made integration into the EU look more likely and government bonds look more attractive, he says.
The behaviour of Eastern European currencies has also played a factor in the attractiveness of government bonds, according to Moulin. The Polish, Hungarian and Czech currencies are all strong against the euro.
'For a euro-based investor, it is very good to invest in these markets,' says Moulin.
He agrees that the main problem for Eastern European bonds would be postponed integration into the EU. 'It could happen if the Polish people do not agree to enter because it is difficult for them to achieve the requirements,' he says.
Poland is the best government bond investment in the region, according to Moulin, followed by Hungary and the Czech Republic. He sees Slovakia as the worst because of its political problems and elections next September, which Moulin believes could see the election of a leader who does not want to become part of the EU.
Liquidity in the region continues to improve, he adds. 'Monetary authorities in these countries want to create a very liquid market because they want to attract investors,' says Moulin.
Turning to western European fixed income markets the impact of 11 September continues to be felt.
Yields at the short end of the market have drifted higher in expectation of central banks taking back the post-11 September rate cuts, according to Jamie Stuttard, portfolio manager at Dresdner RCM Global Investors.
Liquidity improves in emerging Europe.
Low interest rates in Poland.
Authorities keen to produce liquid market.
Political problems in Slovakia.
Eastern Europe entry into EU.
Impact of postponed entry into EU.
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