Hungary Exposure Weighs On Eastern Europe ETFs

by on June 8, 2010 | ETFs Mentioned:

In recent weeks, the fiscal health of Europe has dominated headlines of the financial presses and moved to the forefront of many investors’  minds. With most expecting the worst in Greece, attention has turned to the handful of other cash-strapped governments across the continent, with investors wondering which will be the next to buckle under the weight of a mounting debt burden (see Five Safe Haven ETFs To Ride Out The Storm).

Much of the speculation has focused on Spain, Italy, and Portugal, three major euro zone economies that have been battered by the recent economic downturn and now find themselves in dire financial situations. Economies outside of the euro zone had largely been flying under investors’ radars, so when recently-elected Prime Minister Viktor Orban of Hungary declared recently that the eastern European country had “slim chance” to avoid a “Greek situation,” anxiety spiked around the world.

State Secretary Mihaly Varga subsequently disclosed that the size of Hungary’s deficit may have been understated previously, noting that miscalculations “by orders of magnitude” had been uncovered in the current year’s budget. “If nothing is changed in the budget, the planned budget deficit target can’t be met,” said Varga. “There are a number of tricks in this budget. These numbers are not factual. The government of Gordon Bajnai lied to the country. It didn’t present the real situation in a credible, detailed manner.”

Hungary is less than two years removed from an IMF-sponsored $24 billion bailout, and recent comments from the new administration have caused anxiety that a repeat is possible. Despite efforts from the European Union and IMP to reassure investors, yields on debt have jumped by nearly 150 basis points while the forint has plunged against the beleaguered euro.

Equity markets have been hammered as well, with the Budapest Stock Exchange dropping more than 5% in a single session. Although Hungarian equities are found in ETFs linked to the MSCI Emerging Markets Index, the country receives a very small overall allocation. There are a handful of ETFs with more significant allocations to Hungary, including Eastern European funds offered by iShares and State Street:

  • SPDR S&P Emerging Europe ETF (GUR): This ETF tracks the S&P European Emerging BMI Capped Index, a benchmark that is dominated by Russian equities (which make up about 60% of all holdings). Beyond Russia, Hungary and its neighbors receive moderate allocations as well. Hungary makes up about 5% of assets, with Turkey and Poland accounting for about 25%.

With investors unsure which over the conflicting statements on Hungary’s fiscal health to believe, equity markets there could see volatile times ahead. Moreover, developments in Hungary could quickly ripple throughout the regional and global economy; with the IMF already stretched thin, putting out another fire Eastern Europe could divert resources needed elsewhere.

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Disclosure: No positions at time of writing.