By Jason Hovet
PRAGUE, June 2 (Reuters) - Eastern Europe has lost out on
investor flows in the months-long emerging market rally and
while it has benefitted from higher risk appetite, the recovery
remains fragile as long as big players stay on the sidelines.
Fund trackers have seen a surge in flows to the developing
world after markets hit bottom in March. But in emerging Europe
there has been an outflow from equities, with investors wary of
the problems still haunting the region.
Although Central and Eastern Europe's bourses have jumped 30
to 50 percent since the March lows, currencies are up 10 percent
and bond yields have dropped, the surge has been rocky and
marked by short-term risk taking.
"Positioning in these rallies has been modest," said Koon
Chow, a strategist at Barclay's capital.
"Given that we know investors are still sceptical, they are
only going for... the stories that they are super confident in,
and central Europe unfortunately doesn't tick that box."
Lingering concerns over the health of banks, the possibility
of a country struggling with financing, or worries of spillover
if a Baltic state was forced to devalue its currency remain
risks for Europe's former communist economies.
This keeps open the possibility of a swift reversal within
markets experiencing low liquidity, although short of a crisis
along these lines, strategists expect East and Central Europe to
get pulled along in any wider rally.
NOT AS ATTRACTIVE
Fund tracker EPFR Global data shows in flows into equity
funds covering Asia, ex-Japan, have risen to $6.9 billion
year-to-date, jumping since April. Latin American equity fund
flows have steadily risen to $3.8 billion.
But emerging Europe funds have seen outflows since the start
of the year totalling $792 million, with the Czech Republic,
Hungary and Poland all experiencing outflows.
The threat of systemic shocks has started to weigh on
emerging Europe, with fears of spillover from a possible
currency devaluation in the Baltic countries.
"Despite a continued improvement in global risk appetite,
the CEE markets continue to look a bit soft," Danske Bank wrote
in note on Monday.
"This probably has to be viewed in the light of increased
event risk in the region."
Also, with more dependence on exports and foreign credit,
Poland, the Czech Republic and Hungary have seen heavier
pressure in the downturn than in some other regions, with
economies slowing or shrinking, joblessness rising and fiscal
deficits widening.
Other emerging markets have for the most part built
economies on different market bases or control in-demand natural
resources, creating more attraction now for investors.
"There are opportunities but there are other parts of the
world putting their hands up and clapping, saying look at me,"
said Michael Power, strategist for Investec Asset Management.
"I'll give the Brazil one-liner: that in the last three
months they have had net job creation. That detail alone in the
current environment demands you have a look at what is going on
there."
REFINANCING RISK
Recent Polish and Czech bond auctions have been strong.
Hungary, with a $25 billion International Monetary Fund aid
package, has restarted bond auctions after a half-year pause.
Yields, too, have fallen across the region after a spike of
several percentage points following the collapse of U.S. bank
Lehman, when global credit markets dried up.
However, the recovery is set to stall, especially as central
European budget deficits rise past the European Union's 3
percent of gross domestic product ceiling, which has dashed
hopes of fast euro adoption, while rising financing burdens for
governments have turned off investors.
"The biggest challenge is refinancing of debt. That is the
major risk in attracting investors," said Lars Christensen,
emerging markets analyst with Danske Bank.
"We don't see investors taking long-term bets on this at the
moment... They are playing risk sentiment rather than having a
fundamentally good or bad story."
Currencies have also hit a plateau in a rally led by the
Polish zloty, which has risen 10 percent since a February low.
The last Reuters poll from May 8 saw the zloty, Hungarian
forint, Czech crown and Romania leu at weaker levels in three
months, before rebounding later in the year.[]
Barclays' Chow said even though the region would track a
wider rally upward, it would be restrained as long as big
players stay sidelined and doubts about the region persist.
"I think we are at the beginning of a recovery. But it will
be choppy. A choppy line upwards," he said.
(Reporting by Jason Hovet; Editing by Toby Chopra)
