Hungarian Crisis Crushes The Austria ETF (EWO) - Top 5 Best Performing ETFs
November 21 2011 - 8:09AM
Zacks
Although big economies in Europe continue to dominate the
headlines, a number of smaller nations are also in a great deal of
trouble. Chief among them is Hungary, a small central European
nation that has been dealing with one emergency after another since
the financial crisis first began. In fact, the national currency,
the forint, has fallen by almost 30% since 2008 when Hungary was
first touched by the situation. While normally, this may not be
that disastrous of a situation—as the export industry can speed
ahead—it has been a near death-sentence in Hungary’s case.
That is because many of Hungary’s citizens, thanks to cheap
loans denominated in foreign currencies, such as the franc and
euro, went on a debt binge. While this may have been fine when the
global economy was chugging along, the sharp devaluation of the
forint has made many of these loans nearly impossible to pay back,
forcing many Hungarians to seek bankruptcy protection or at the
very least, cut back on spending. This has had a ripple effect down
the economy, leading growth levels sharply lower and cutting tax
revenues to the government as well. Thanks to this precarious
situation, credit ratings agencies have threatened to cut the debt
of Hungary down to junk, forcing the nation to seek another bailout
from the IMF, the second in about three years.
This marks a huge reversal for the nation as many were extremely
dissatisfied with the first bailout which only led to reduced
spending, high unemployment, and sweeping austerity measures across
the economy. Nonetheless, the country is running out of options and
seems somewhat desperate to stop the slide in the national currency
and to turn around investor perceptions of the nation. Time is
certainly running out, especially considering that the government
cancelled a debt auction of short-term bills recently in light of
the market events and the lackluster investor demand.
The only hope now appears to be a fresh lifeline from the IMF in
order to help restore some semblance of investor confidence in the
struggling country. “We believe a new IMF program could have
several benefits, including the provision of fiscal and external
financing, or the option of it,” ratings agency Fitch said on the
subject. “It could also boost market confidence and introduce more
transparency and consistency to policymaking.” With that being
said, given that this is already the second time around for the
nation in terms of bailout programs, there is still some skepticism
as to whether this program will work this time. “Even if a deal
were agreed, the potential for reform fatigue, a track record of
unpredictable policymaking and a desire for asserting national
independence could make it challenging to stick to an IMF program,”
Fitch said.
Fortunately for investors, there is no Hungarian ETF at this
time, as undoubtedly, the fund would be one of the biggest losers
so far in 2011. However, Austria, a traditional partner of Hungary,
has been especially hard hit by the nation’s crisis thanks in large
part to Austrian financial institutions and their heavy involvement
in the country. This has made the iShares MSCI Austria Index
Fund (EWO) one of the single biggest losers in the ETF world so far
this year. EWO has fallen by nearly 40% on the year and a closer
look at the holdings reveals why; the top sector is financials.
Further to this point, two of the fund’s top ten components are
banking institutions and both of these securities have lost more
than 60% this year alone.
These massive losses, coupled with fears over bank
recapitalizations and more turmoil in the region, have pushed many
investors out of the country despite Austria’s relatively sound
financial position. In fact, Austria is currently rated ‘AAA’ while
debt is projected to peak at 75.5% of GDP and the budget deficit is
expected to recede from the 3.2% level sometime next year.
Nevertheless, the specter of further losses in the large banking
sector has pushed investors out of the Austrian ETF, leading the
fund to steeper losses on the year than products targeting Italy
(EWI), Spain (EWP), or even the European Financial Sector
(EUFN)
This brewing Hungarian crisis should also show investors that
the risks are not just in the large European economies of Spain and
Italy, nor are they in exclusively in euro zone economies such as
Greece. Instead, contagion can spread beyond the common currency
bloc and infect relatively strong nations, such as Austria, in that
way. In other words, although a national economy may appear to be
strong on the outside, a closer look at some of its biggest
components and where their exposure lies can often times reveal a
financial system that is facing severe problems. The only good news
is that should Hungary manage to bottom out in the near term,
especially if a new IMF program takes hold, the Austrian ETF could
be due for quite the bounce back in 2012. Many of the other
companies in the fund are relatively strong and solid ties to other
powerful economies such as Germany could suggest to many that the
nation’s fund has been oversold so far this year. Either way, EWO
looks to be a fund to watch in the near term, as the product could
continue to serve as a barometer for the central European region
going forward in these uncertain times.
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