Rexiter sees gains in Hungary, Polish local debt

LONDON Wed Sep 30, 2009 5:25pm BST

LONDON (Reuters) - Hungarian and Polish local debt offers investors potential gains, a fixed income fund manager with emerging-markets specialist Rexiter said on Wednesday.

Daniel Wood, who runs Rexiter's $10 million local-currency emerging debt fund that recently opened to investors, said short positions on Lithuania and Latvia currency forwards were also good plays.

"Our favorite picks (in the region) at the moment would be Poland and Hungary. From a currencies perspective, they have been hardest hit and the fundamentals don't justify that," Wood told the Reuters Central and East European Investment Summit in London.

Since mid-2008 peaks, Hungary's forint remains 16 percent weaker while the Polish zloty is down 30 percent to the euro. Both currencies remain about 2.5 percent weaker to the common currency since the start of the year.

Wood said he was bullish on Hungarian debt as the country was lagging the monetary easing cycle begun elsewhere.

"We think that Hungary has been very conservative ... they are vulnerable to foreign currency moves but we believe that if you look at their fundamentals and economy, there are more rate cuts to come relative what has been priced into the curve," he said.

Rate cuts were likely coming to an end soon in Poland, Wood said, but the flattening of the curve there meant that there were some gains to be had at the longer end.

Wood was not particularly worried about fiscal shortfalls in both countries -- Poland plans to double its budget deficit next year -- as both had strong growth prospects.

Poland's ambitious privatization plan could give it a larger-than-expected boost to state coffers, while Hungary has put in place "sensible" fiscal reforms, he said.

"Generally, globally we are not positioned for rate cuts. We believe that a lot of markets are at the end of their rate cut cycles or should be," he said, adding that Turkey was one of the economies where interest rate cuts have been too aggressive.

Wood said Rexiter had previous taken "tactical" short positions on Latvian lat and Lithuanian lita currency forwards and that these could become attractive again as the market periodically underestimates the magnitude of their possible devaluations.

"When the market is pricing in approximately seven percent devaluation, we have been short those currencies because we ultimately think the pegs will break and see around 30-40 percent," he said.

Eastern Europe local debt has generally underperformed the JPMorgan GBI Emerging Markets Government Debt benchmark compared to Latin America and Asia, with strong returns seen from Brazil, Indonesia and Argentina.

Rexiter's local-currency bond fund has returned 16.4 percent in the year-to-date, compared to the 18.4 percent performance of its benchmark. This compares to the hard-currency JPMorgan EMBI Index which has returned nearly 24 percent.

Rexiter, owned by State Street Global Alliance, has $4.5 billion in emerging-market assets.

(Reporting by Sebastian Tong; Editing by Rupert Winchester)