CEE Capital Markets & Fixed Income Trading Ideas

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Wilfred Simpson
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1 & Fixed Income Trading Ideas May, 2014 Zachary Carvell, Head of Institutional Solutions & Product Management

2 Out of 150 Sovereign Bonds in CEE Issuer Code Currency Debt instrument MDuration Price MID YtD HGB HUF HUNGARY HUF HGB 6 3/4 08/22/ % 0.0% -0.1% -0.2% -0.8% -1.2% -1.0% HGB HUF HUNGARY HUF HGB 8 02/12/ % 0.1% 0.0% -0.1% -0.9% -1.2% -0.9% HGB HUF HUNGARY HUF HGB 7 3/4 08/24/ % 0.2% 0.2% 0.3% -0.5% -0.4% 1.1% HGB HUF HUNGARY HUF HGB 5 1/2 02/12/ % 0.5% 0.6% 0.7% 0.2% 0.8% 4.8% HGB HUF HUNGARY HUF HGB 5 1/2 12/22/ % 0.5% 0.6% 1.0% 0.1% HGB HUF HUNGARY HUF HGB 6 3/4 02/24/ % 0.5% 0.5% 0.7% 0.0% 0.5% 4.2% HGB HUF HUNGARY HUF HGB 6 3/4 11/24/ % 0.5% 0.7% 1.0% -0.1% 0.2% 4.7% HGB HUF HUNGARY HUF HGB 5 1/2 12/20/ % 0.2% 0.4% 0.8% 0.6% HGB HUF HUNGARY HUF HGB 6 1/2 06/24/ % -0.1% 0.0% 0.4% 0.2% -0.7% 4.6% HGB HUF HUNGARY HUF HGB 7 1/2 11/12/ % -0.1% -0.1% 0.0% 0.8% -1.2% 3.9% HGB HUF HUNGARY HUF HGB 7 06/24/ % -0.5% -0.3% -0.5% 1.5% -0.7% 3.6% HGB HUF HUNGARY HUF HGB 6 11/24/ % -0.7% -0.3% -0.4% 2.0% -0.8% 4.9% HGB HUF HUNGARY HUF HGB 6 3/4 10/22/ % -0.9% -0.6% -0.6% 2.7% -1.3% -0.1% RAGB EUR AUSTRIA EUR RAGB /15/ % -0.1% -0.2% -0.3% -1.0% -2.1% -5.2% RAGB EUR AUSTRIA EUR RAGB /20/ % -0.1% -0.1% -0.3% -0.8% -1.6% -4.1% RAGB EUR AUSTRIA EUR RAGB 3 1/2 07/15/ % -0.1% -0.1% -0.3% -0.8% -1.5% -3.9% RAGB EUR AUSTRIA EUR RAGB 4 09/15/ % -0.1% -0.2% -0.3% -0.7% -1.3% -3.7% RAGB EUR AUSTRIA EUR RAGB /20/ % -0.1% -0.2% -0.2% -0.4% -0.6% -2.6% RAGB EUR AUSTRIA EUR RAGB /15/ % -0.1% -0.2% -0.3% -0.4% -0.7% -3.4% RAGB EUR AUSTRIA EUR RAGB /15/ % -0.1% -0.2% -0.2% -0.3% -0.7% -3.4% RAGB EUR AUSTRIA EUR RAGB /15/ % -0.1% -0.2% -0.1% 0.2% 0.1% -2.2% RAGB EUR AUSTRIA EUR RAGB /18/ % 0.0% -0.2% 0.0% 0.9% 1.2% 0.3% RAGB EUR AUSTRIA EUR RAGB /15/ % 0.0% -0.1% 0.1% 1.0% 1.1% -1.0% RAGB EUR AUSTRIA EUR RAGB 3 1/2 09/15/ % 0.1% 0.0% 0.3% 1.6% 1.8% -0.1% RAGB EUR AUSTRIA EUR RAGB /20/ % 0.1% 0.1% 0.4% 1.6% 2.1% -0.1% RAGB EUR AUSTRIA EUR RAGB /22/ % 0.2% 0.2% 0.5% 2.0% 2.4% 0.5% RAGB EUR AUSTRIA EUR RAGB 1 3/4 10/20/ % 0.3% 0.3% 0.8% RAGB EUR AUSTRIA EUR RAGB /15/ % 0.4% 0.5% 0.8% 2.5% 3.0% 0.1% RAGB EUR AUSTRIA EUR RAGB 6 1/4 07/15/ % 0.5% 0.5% 0.9% 2.5% 2.9% -0.6% RAGB EUR AUSTRIA EUR RAGB /15/ % 1.1% 1.3% 1.6% 4.3% 5.6% 1.6% RAGB EUR AUSTRIA EUR RAGB /23/ % 1.1% 1.3% 1.8% RAGB EUR AUSTRIA EUR RAGB /20/ % 1.5% 1.7% 1.9% 5.0% 7.1% 3.0% RAGB EUR AUSTRIA EUR RAGB /26/ % 2.0% 2.1% 2.5% 5.7% 8.3% 5.1% POLA USD POLAND USD POLAND 5 10/19/ % 0.0% -0.1% -0.3% -0.8% -1.4% -4.1% POLA USD POLAND USD POLAND 5 1/8 04/21/ % -0.1% -0.3% 0.5% 1.4% 0.7% -5.8% POLA USD POLAND USD POLAND 3 03/17/ % -0.3% -1.3% 0.1% 1.9% 0.5% -5.6% ROMG RON ROMANIA RON ROMGB 6 1/4 10/25/ % -0.2% -0.3% -0.4% -1.4% -1.4% 1.2% ROMG RON ROMANIA RON ROMGB 6 04/30/ % -0.2% -0.2% -0.2% -1.3% -0.8% 3.0% ROMG RON ROMANIA RON ROMGB /26/ % -0.1% -0.2% -0.2% -1.3% -0.6% 4.1% Source: Bloomberg 2

3 The Top 20 YtD at the End of April Were. Debt instrument MDuration 28 YtD Rating COUNTRY Curve Segment SLOREP 5 1/8 03/30/ % 15.6% BBB SLOVENIA Long dated SLOREP 4 5/8 09/09/ % 13.7% BBB SLOVENIA Long dated SLOREP 4 3/8 01/18/ % 9.7% BBB SLOVENIA Mid Segment REPHUN 3 7/8 02/24/ % 9.4% BB HUNGARY Mid Segment SLOREP 4 1/8 01/26/ % 8.7% BBB SLOVENIA Mid Segment ROMGB /11/ % 8.0% BBB ROMANIA Mid Segment SLOVGB 4 1/2 05/10/ % 7.6% BBB SLOVAKIA Long dated SLOREP 4 3/8 02/06/ % 7.5% BBB SLOVENIA Mid Segment SLOVGB 3 3/8 11/15/ % 7.4% BBB SLOVAKIA Long dated SLOVGB /14/ % 6.9% BBB SLOVAKIA Long dated ROMGB /26/ % 6.8% BBB ROMANIA Short dated REPHUN 4 3/8 07/04/ % 6.2% BB HUNGARY Short dated REPHUN 6 01/11/ % 6.2% BB HUNGARY Mid Segment REPHUN 3 1/2 07/18/ % 5.9% BB HUNGARY Short dated RAGB /26/ % 5.1% AA+ AUSTRIA Long dated REPHUN 5 3/4 06/11/ % 5.1% BB HUNGARY Mid Segment ROMGB 5 3/4 01/27/ % 5.1% BBB ROMANIA Short dated ROMANI 4 7/8 11/07/ % 5.0% BBB ROMANIA Mid Segment HGB 6 11/24/ % 4.9% BB HUNGARY Long dated ROMGB 6 3/4 06/11/ % 4.9% BBB ROMANIA Short dated Source: Bloomberg 3

4 Mostly in the Belly of the Curve AUSTRIA SLOVAKIA ROMANIA SLOVENIA HUNGARY Short dated 3 2 Long dated Mid Segment Source: Bloomberg 4

5 But Longer Duration in Higher Ratings # of Debt instrument Curve Segment Short dated Mid Segment Long dated 2 0 AA+ BB BBB Rating Source: Bloomberg 5

6 Which Have Been the Most Stable Average Price Chng YtD Average Price Chng 1M 12% 10% 8% 6% 4% 2% Werte Average Price Chng YtD Average Price Chng 1M 0% AUSTRIA HUNGARY ROMANIA SLOVAKIA SLOVENIA -2% -4% COUNTRY Source: Bloomberg 6

7 Why? 7

8 Almost 65% of All Our Client Inquiries in Q1 Were for Higher Rated Bonds Amongst Sovereign Issuers in CEE # inquired 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Highly Rated Middle Rated Lower Rated Rating2 Rating Source: EGB 8

9 And Predominantly for the Long End of the Curve Country of Issuer 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Curve Segment Long dated Mid Segment Short dated COUNTRY Source: EGB 9

10 Which Most Clients Wanted to Buy Country of Issuer 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% SIDE ASK BID COUNTRY Client Request for Side e.g. for a bid = client sells Source: EGB 10

11 So? 11

12 Unless You Look at Volumes! Inquired Vol in EUR 60.00% 50.00% 40.00% 30.00% 20.00% SIDE ASK BID 10.00% 0.00% AUSTRIA COUNTRY Given that there were more buy inquiries but equal volumes, the average sell inquiry was 26% BIGGER than the average inquiry to buy!! Source: EGB 12

13 Say What? 13

14 To Reach Equilibrium, You Need to Find 13 Clients Who Want to Buy For Every 10 Who Want to Sell 14

15 So Only 33% of The Inquiries Looking to Sell Actually Trade vs 45% of those Looking to Buy Inquiries 50.00% 45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% COUNTRY AUSTRIA SIDE Status ASK - No Trade ASK - Traded BID - No Trade BID - Traded Source: EGB 15

16 22% of Volume Inquired Was to Buy the Long End with an 88% Probability of a Trade (9% Higher than the Average) Inquired Vol in EUR 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% COUNTRY ASK BID ASK BID ASK BID Long dated Mid Segment Short dated AUSTRIA Curve Segment SIDE Status No Trade Traded Source: EGB 16

17 If You`re Now Doing This You Won`t See This Did he just say something? Shhh..I`m pretending to take notes 17

18 And the Rest of You Are Thinking. 18

19 To Summarise Highly rated bonds With long durations Were amongst the top 20 outperformers in CEE YtD In terms of returns And stability With a high probability for buyers to find sellers 19

20 BUT.. Source: Bloomberg We May Be Reaching a Turning Point That`s My Point! 20

21 So.. Highly rated bonds With long durations Could be amongst the top 20 underperformers in CEE soon With a low probability for sellers to find buyers 21

22 The Worst of Both Worlds for CEE Source: Bloomberg Pressures may re-emerge.along the path toward monetary policy normalization in advanced economies, and the possibility of protracted weak growth in the euro area (IMF, 29th April 2014) 22

23 Source: Bloomberg 23

24 Source: Bloomberg 24

25 Source: Bloomberg 25

26 Source: Bloomberg 26

27 Source: Bloomberg 27

28 Source: Bloomberg 28

29 Source: Bloomberg 29

30 Source: Bloomberg 30

31 Source: Bloomberg 31

32 Source: Bloomberg 32

33 Source: Bloomberg 33

34 Source: Bloomberg 34

35 Source: Bloomberg 35

36 36

37 37

38 To Boldly Go Where No Man Has Gone Before 38

39 What Does This Mean For CEE? Ben says the T Word After May 22nd 2013, the PLN sold off along with long dated Polish Eurobonds. Both have recovered almost 100% starting roughly 6 months ago. Source: Bloomberg 39

40 Performance (fx hedged) Currency Debt instrument MDuration 181 EUR POLAND 5 1/4 01/20/ % EUR POLAND 3 3/4 01/19/ % EUR POLAND 4 03/23/ % EUR POLAND 3 3/8 07/09/ % EUR POLAND 4 1/2 01/18/ % EUR POLAND /15/ % USD POLAND 5 1/8 04/21/ % USD POLAND 3 03/17/ % EUR POLAND /15/ % EUR POLAND 5 5/8 06/20/ % PLN POLGB 4 10/25/ % EUR POLAND 3 3/4 03/29/ % PLN POLGB 3 3/4 04/25/ % PLN POLGB 4 3/4 04/25/ % PLN POLGB 5 1/4 10/25/ % PLN POLGB 5 1/2 10/25/ % PLN POLGB 5 04/25/ % PLN POLGB 5 1/4 10/25/ % PLN POLGB 5 3/4 09/23/ % EUR POLAND 3 5/8 02/01/ % PLN POLGB 3 08/24/ % PLN POLGB 5 1/2 04/25/ % PLN POLGB 6 1/4 10/24/ % USD POLAND 5 10/19/ % Long dated foreign currency bonds have outperformed Short dated local currency bonds have underperformed Source: Bloomberg 40

41 The Opposite of Performance After the T Word And now at extremes Source: Bloomberg 41

42 Across CEE 6 m performance 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% -5.00% MDuration Country Source: Bloomberg 42

43 A Word of Warning Eastern Europe Risks New Funding Shock on Fed Tapering, IMF Says Eastern Europe s vulnerability to sharp withdrawals of foreign capital has been heightened as the U.S. Federal Reserve scales back stimulus and the standoff over Ukraine escalates Gross external liabilities, including foreign direct investment, cross-border lending and portfolio investments, were at about 90 percent of the region s gross domestic product at the end of 2012, about 20 percentage points higher than at end-2008 The susceptibility of eastern Europe to funding shocks derives from relatively high stocks of external debt, large refinancing needs and foreign-currency exposures This vulnerability is deepened by other factors, such as increased foreign investor participation in local bond markets which poses the threat of outflows if developed economies begin to offer higher yields Eastern European nations rely on a small number of creditors, making portfolio flows sensitive to allocation decisions of a few fund managers To mitigate risk of external shocks, authorities may consider greater exchange-rate flexibility and higher policy rates Source: Bloomberg 43

44 And What if We`re Wrong? Source: Bloomberg 44

45 What Do You Do? Let`s start by asking what we do NOT want Highly rated bonds With long durations Low rated bonds With short durations In local currency 45

46 We Want Middle rated bonds With medium duration In hard currency Floating rate 46

47 Directly From the Trading Desk Croatian bonds - both local and eurobonds are still well bid even though a new issue was announced for June We think CROATI 6 ¼ 04/27/17 in USD is the best opportunity in Croatia with a 3 year maturity and a Z-spread of 255 bps Comparables: 4y EUR issue around 210 bp spread (CROATI 5 ⅞ 07/09/18) 3y HRK domestic issue around 170 bp spread over HRK mid swap We could do an ALN on it in any CEE currency and EUR ALN vs CLN: A CLN in the same maturity would be less attractive, as the basis for the bond is around 0 or slightly negative (while other Croatian bonds trade at a positive basis of up to 90 bps) and the bond market is more liquid than CDS. 47

48 Disclaimer This Document was prepared by Erste Group Bank AG and/or its affiliate named herein (collectively the Erste Group ) as marketing communication to our professional clients. This document is not issued to, nor intended for private customers. It has been provided for general information and is not to be construed as a personal investment advice or recommendation; an offer to buy or sell; solicitation or recommendation of any offer to subscribe, to buy or sell or to participate in any financial product referred to herein (the Financial Instrument ) or to engage in any trading strategy involving them. If a transaction is entered into, the terms and conditions will be fully reflected in the final documentation, which will supersede and replace this document in its entirety. All information, terms and pricing set forth herein is indicative, based on, among other things, market conditions at the time of this writing and is subject to change without notice. All illustrations, analyses and conclusions contained herein are of a general nature. This Document neither provides a full and complete overview of the transaction itself, the potential risks and consequences, nor take into account the individual circumstances and needs of our investors regarding income, taxes and risk tolerance, or whether Financial Instrument is a suitable or appropriate investment for them. Financial instruments involve different risk levels and besides the benefits described herein, the transaction involves risks to be considered by the investor. The illustrated market performance and sample calculations cannot provide reliable predictions about the future performance. Past performance is not necessarily indicative for future performances and transactions in financial instruments may involve significant risks and can be considered as speculative. Since not all transactions are suitable for every investor, the investor shall, prior to the entering into any transaction, consult its independent advisors (including but not limited to legal and tax advisor), to make sure that, irrespective of the information herein, the planned investment fits into the investor s needs and preferences and that the involved risks are fully understood by the investor and that after due consideration the investor is convinced that s/he wish to enter into the planned transaction, is able to do so and can bear the economic consequences. The Austrian Securities Supervision Act 2007 customer information available at investor s credit institution must be taken into account by the investor. Although the information herein has been obtained from, and any opinions herein are based upon, sources believed reliable, Erste Group (including its principals, employees and/or representatives) makes no representation and warranty, express or implied, to the accuracy, completeness and correctness of the information contained herein. Neither Erste Group nor any of its principals, employees and/or representatives shall be liable for any losses or damages whatever its nature is (including but not limited to any direct, indirect or consequential loss or loss of profit) and which may result from reliance upon the information herein. From time to time, Erste Group, its principals, representatives or employees of Erste Group respectively may have a position in the Financial Instrument or hold options, warrants or rights with respect thereto or other financial instruments of such issuers and may make a market or otherwise act in transactions in any of these financial instruments. Erste Group, its principals, representatives and/or employees may from time to time provide investment banking or consulting services to or serve as a manager/director in a company referred to herein. The distribution of this Document and the Financial Instrument referred to herein is restricted or prohibited in certain jurisdiction such as, inter alia, Australia, Canada, Great Britain, Japan and the United States of America. In particular, this Document may not be distributed and the Financial Instrument may not be offered or sold within the United States of America or to, or for the account or benefit of, any U.S. Persons (as defined in Regulation S under the U.S. Securities Act of 1933 as amended) unless an exemption under U.S. law or the state laws in the United States is applicable. Persons into whose possession this Document comes are required by Erste Group to inform themselves about and to observe such restrictions. Additional information can be obtained from Erste Group upon request. This Document is based on the level of knowledge of the person entrusted with their compilation on the date of its preparation. The Document should not be regarded as financial, legal, tax, regulatory or other advice. It is not construed as financial analysis under WAG Any statement herein is nonbinding and without any obligation. Erste Group is not responsible for printing or typographical errors. Erste Group

CEE Capital Markets & Fixed Income Trading Ideas. September, 2014 Zachary Carvell, Head of Institutional Solutions & Product Management

CEE Capital Markets & Fixed Income Trading Ideas. September, 2014 Zachary Carvell, Head of Institutional Solutions & Product Management & Fixed Income Trading Ideas September, 2014 Zachary Carvell, Head of Institutional Solutions & Product Management Some people are scared of spiders August 14 2 ..some people are scared of mice.. August