Interest rates may rise more than expected in Hungary and Slovakia, while the risks are to the downside in Poland and the Czech Republic, according to Dresdner Kleinwort Wasserstein. Political risks following the Slovak election and uncertainty over Hungary’s commitment to reductions in the budget deficit suggest the possibility of faster rate hikes than currently priced in, the bank’s analysts wrote.
The Czech benchmark lending rate will likely rise 50 basis points to 2.5 % by the end of this year but the risk is that downward seasonal pressures on inflation and a currency bounce-back will delay hikes, Dresdner said. Poland’s near-term political stability and low inflation will limit zloty weakness and suggest the national bank may be able to hold off rate rises, Dresdner predicted.
Risk premia – expressed as the gap between equities expected return and bond yields – haven’t recovered sufficiently to tempt AXA’s investment managers. The spread of Latin America’s risk premium above the global market, at 153 basis points, is close to its historical average of 200 basis points but Eastern Europe’s remains far below, according to AXA’s senior strategist Frank Wenzel. “Our concerns due to mounting risks, in particular regarding tighter monetary policy continue to warrant a cautious stance on this asset class,” Wenzel said. “If anything, Latin America looks somewhat more attractive than Eastern Europe.”
Atlantis investment management is also cautious: “Our fund’s overall focus remains on companies that are domestically orientated and to a certain extent insulated from an external demand slowdown,” said Tony Jordan, manager of the Atlantis Asian Recovery Fund.
Fund managers aren’t showing a renewed willingness to take on risk, Dresdner wrote, suggesting emerging markets currencies in Asia won’t gain a significant boost from foreign inflows any time soon. An equity fund selloff continued last week with net selling in Korea, Taiwan and Thailand, analysts Sabrina Jacobs and Arnab Das said.
The Kazakh tenge has “significant potential” to appreciate, according to Credit Suisse, which recommends long positions on tenge non-deliverable forward contracts up to two years. Strong economic growth, a buoyant balance of payments position and the central bank’s focus on inflation could help the currency appreciate towards 115 per US dollar during the rest of this year, the bank predicted. There remains a risk is that the central bank could intervene to depress the tenge, the bank noted.
The Indian rupee’s real effective exchange rate remains overvalued by about 2.2%, even after retreating from an overvaluation of almost 9% a few months ago, Standard Chartered wrote. There is “significant room” for continued nominal effective appreciation of the Malaysian ringgit, the bank said, adding that economic fundamentals mean the authorities will probably be comfortable with this move.