Energy prices and economic development: How are they influencing Eastern Europe’s bonds?
Central and Eastern European bond markets enjoyed a very good year overall in 2023. And unlike the bond markets in the USA and Eurozone, they also saw a decent amount of value appreciation above all before the strong final quarter. A key factor in this was the declining inflation rates. Inflation rates in Eastern Europe were (and are) in part significantly higher than in the Eurozone and USA. But they also retreated especially significantly and in some cases more rapidly than had been expected by market participants and the central banks. This fuelled speculations about interest rate cuts. At the same time, it also reduced the risk that the central banks in the region might maintain high interest rates for too long, thus excessively hurting the economy. Poland also profited from the opposition victory in the parliamentary elections in autumn. And Poland and Hungary achieved the release of part of their previously frozen EU funding.
The decline in inflation was driven above all by rapidly falling prices for energy commodities, which had previously been the main impetus for the inflation increases. Directly, oil, gas, and other energy commodities only make up a small part of the goods basket for calculating inflation. But these prices also impact the prices of many other products and services. Because of this, there is likely further downside potential for inflation in the coming months – paving the way for potential key rate cuts. At the same time, many governments tried to soften the impact of the higher energy prices on households and businesses at least in part through aid programmes and price controls. These measure will likely gradually be wound down, which will in turn push prices up.
Eastern European bond markets: On the way to an economic upturn?
The leading economic indicators are showing clear signs of stabilisation. The release of part of the previously frozen EU funding should have a very positive impact on the economy in Poland and Hungary. At the same time, a large number of major international companies are relocating to or expanding their sites in Eastern Europe. All of this is increasing the chances of an economic upswing throughout the region in the coming quarters. Unemployment is also still low, which points to latent wage pressure and thus also to a possible resurgence of inflation in an economic upturn. If the world market prices for oil and gas do not rise markedly, however, a new inflationary trend should remain well below the inflation rates seen over the last two years.
All in all, much evidence supports expectations for a continued decline in inflation and bond yields combined with decently solid economic conditions in Eastern Europe. Of course, at least temporary trend reversals are possible, and the financial markets have also already priced in part of these developments. Simultaneously, new temporary or also lasting distortions in the supply chains and transport costs (and thus the cost of goods) and in energy prices are possible as a result of the tense situation in the Middle East. It would thus be a mistake to assume that bonds and currencies in Eastern Europe will only move in one direction.
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Raiffeisen-Osteuropa-Rent: long track record and attractive yields
With that being said, the bond markets in the region remain attractive with significant yield advantages over the Eurozone. Raiffeisen-Osteuropa-Rent offers a good way to profit from this with its long and mostly very successful investment track record in the region. Its current portfolio return is at around 5.3% p.a. This is of course just a rough indication for possible returns, and the actual result may lie above or below this. In general, it is likely that the majority of the potential earnings on the Eastern European bond markets will come from coupons this year rather than further price increases or currency movements. Because of this, returns in 2024 will very likely not be as high as in 2023.