Poland's Haven Allure May Be Blinding Investors to Election Risk

Updated on
  • Amundi favors Hungary, Romania bonds as safer harbors in rout
  • Polish bonds have outperformed all major emerging markets

The favored shelter for emerging-market investors may be riskier than many bondholders perceive.

Polish bonds outperformed all major emerging markets in the aftermath of China’s yuan devaluation, driving yields to the lowest relative to nearby Hungary in seven weeks. Yet it’s Hungary along with Romania that represent safer harbors to Amundi as the money manager braces for a predicted election victory in Poland by a party pledging to slap special taxes on banks and reduce the retirement age.

“While Poland is still a good story, there’s concern over its fiscal and tax measures by the new government,” Esther Law, who manages emerging-market debt in Amundi’s $1.09 trillion of assets, said in an interview. The Amundi Global Emerging Local-Currency bond fund she co-manages outperformed 73 percent of peers in the past month, according to data compiled by Bloomberg.

The willingness of investors to suspend concern over the October election may say more about the dearth of opportunities to escape the fallout from slowing Chinese economic growth than any upsurge of confidence in Poland’s incoming administration. The country’s appeal is further dented by the unresolved issue of the costs banks will bear as their customers convert $38 billion of mortgage loans from Swiss francs.

After China roiled world markets by devaluing its currency on Aug. 11, Polish bonds rallied. Their returns at 2.9 percent in dollar terms trailed only Serbia, Bulgaria and Croatia at the end of last week, according to data compiled by Bloomberg. While the bonds fell this week as contagion from plunging commodity prices spread, the yield discount on Polish 10-year local-currency government bonds widened to 89 basis points less than Hungary’s on Monday, the most since July 8. It shrank to 81 basis points on Thursday, while an equivalent Romanian bond yielded 88 basis points more than Poland’s.

“Hungary and Romania will be a safer bet than others at this stage,” said Amundi’s Law, citing their fiscal policies among reasons.

The opposition Law & Justice, the party leading opinion polls, plans to tax bank assets at a cost of about 5 billion zloty ($1.3 billion) a year for the industry. That levy would come on top of the costs of supporting homeowners hurt by this year’s surge in the Swiss currency against the zloty. Losses related to a proposed law forcing banks to convert franc-denominated home loans may total about 21 billion zloty, according to Poland’s central bank.

“Hungary managed to take care of its foreign-exchange loans and so they are now less exposed,” Law said by phone on Tuesday. “That underlines why I prefer Hungarian or Romanian bonds to Poland government bonds at this stage.”