Reuters Summit-Rexiter sees gains in Hungary, Polish local debt

                                
For more from the Reuters Central European Investment Summit,
click on:
http://www.reuters.com/summit/CentralEuropeanInvestment09?pid=500
                                
 By Sebastian Tong
                                
 LONDON, Sept 30 (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 favourite 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 <EURHUF=> remains 16
percent weaker while the Polish zloty is down 30 percent
<EURPLN=> 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 <HU5YT=RR> 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 [PL/GOVT1].
                                
 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 privatisation 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 <EURLVL1Y=> and Lithuanian lita
<EURLTL1Y=> 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 <11EMJ> 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)