Analysis: Central Europe sheltered from emerging markets sell-off

Thu Aug 22, 2013 10:39am EDT
 
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By Marcin Goettig and Sujata Rao

WARSAW/LONDON (Reuters) - The currencies of emerging European countries such as Poland and Hungary have dodged the giant selloffs hitting other emerging markets, and their links to a steadily recovering euro zone are likely to keep them insulated.

For years, Europe's slump and cautious monetary rules have dragged down economic growth in the region, making these countries less exciting for investors than destinations in Asia and Latin America. Now that curse is turning into a blessing.

Former investor darlings such as Brazil and India have seen currencies tumble as investors flee their stocks and bond markets in fear of a sharp growth slowdown. Their peers in central Europe, however, are largely holding steady.

Hit by the U.S. Federal Reserve's plans to reduce the flow of cheap money it pumps into the global economy, currencies such as South Africa's rand, India's rupee and Brazil's real have fallen 15-18 percent against the dollar this year.

By contrast, Poland's zloty has eased 3 percent against the dollar since January, while Hungary's forint, considered the riskiest regional bet because of Prime Minister Victor Orban's unorthodox policies, is down 2 percent

"This is due to a combination of a better outlook for core Europe, where the economy seems to be recovering, and an improvement in the underlying fundamentals of most of these countries," said Thanasis Petronikolos, head of emerging debt at Baring Asset Management in London.

He said his investment portfolio was factoring in that central Europe would perform better than emerging markets in Asia and some in Latin America.

No doubt, there are some clouds on central Europe's horizon - uncertainty about the impact of upcoming Fed measures and political instability ahead of elections next year.   Continued...

 
The WIG20 index graph is seen on screen at the Warsaw Stock Exchange October 3, 2012. REUTERS/Kacper Pempel