Chaos-Fleeing Investors See Europe's Populist East as No Russia

Some populist-ruled countries are riskier than others.

Eastern Europe, home to a new class of illiberal leaders within the European Union, is becoming a favorite for emerging-market investors as trade threats, sanctions and geopolitical risks spur a retreat from high-yielding debt in Russia and Turkey. Bonds from Poland to Hungary beat peers this month.

EM Divide

Turkish, Russian bonds suffer as Poland to Hungary rally

Source: Bloomberg

Renewed global volatility is testing investor resolve to stick to local-currency bonds that were previously market darlings. Russian bonds and the ruble tumbled after the U.S. widened sanctions and as tension in Syria mounted last week. Turkey’s lira is also exposed to Syria’s civil war as well as local monetary policy that many deem too loose. Central European markets, by contrast, are still benefiting from non-inflationary growth and cooling political tensions.

“The current uncertainty on Russia and Turkey certainly makes Central and Eastern Europe a ‘safer’ place on a relative basis,” said Esther Law, an emerging-market debt manager at Amundi SA, Europe’s largest asset manager that oversees 1.4 trillion euros ($1.7 trillion). “Asset rotation is likely to happen in favor of CEE, especially if we don’t have a more hawkish-than-expected European Central Bank.” Law says she prefers Polish bonds.

Lower-yielding eastern European debt has found support in a bout of subdued inflation that has helped push away the prospect of tighter monetary policy. Polish rate setters have even been flirting with the idea of putting interest-rate cuts back on the agenda. The nation’s 10-year bond yields fell below 3 percent for the first time since 2016 last week.

Policy Continuity

In Hungary, where policy makers have pledged to keep borrowing costs at a record low for an extended period, the debt agency sold the most bonds at a competitive sale since 2014 last week. Foreign ownership of debt has jumped to the highest since November 2016.

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