Beyond general information of the Funds, the portfolio reports offer a strategic overview on the latest performance.

Investors rejoicing over July’s excellent performance were in for a cold shower in the following month, as August held no pleasant surprises in store. The S&P500 index fell by 6.8% and thee merging equity markets by 4.23% in dollar terms, and even holders of Hungarian state bonds had no cause for celebration, as the value of their investments dropped 0.27%. The EMBI, or Emerging Markets Bond Index, was virtually the only good performer, and rose by 1.81%. In our outlook for August we turned our attention to maize, which in line with our forecast, and on the back of the Russian export embargo, managed to maintain its upward trend and gained almost 8% in price over the last months of the summer.

Unfavourable and favourable macro data alternated with each other in August, and we even witnessed a new low in the US residential real estate market. (In July 3.83 million used and 276 thousand new homes had changed hands, against a backdrop of falling prices). Interestingly, according to ISM data, the American manufacturing industry gained new momentum in August, as the index rose from the previous month’s 55.5 to 56.3. The indicators that usually reflect the state of the economy offer noclear guidance, as the equity markets continue to be characterised by turbulent price movements andtrading patterns display no firm trends, so there is still good reason to err on the side of caution. We recommend slightly overweighting European, Japanese and Asian stocks, while in the case of the US and emerging markets we maintain a neutral position relative to the benchmark. We prefer regional peers over Hungarian bonds, as the positive shift in the EUR/HUF exchange rate and their more favourable government borrowing situation suggest that they could outperform.

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Much has been written, in many places, about the past few months’ deterioration in Hungary’s fundamentals; however, it’s a little known fact that the stark disparity between Hungary’s performance and that of its peers is due, in equally large measure, to the macroeconomic success story of our regional competitors, notably the Czech Republic. Of course, the positive Czech example is nothing new: as far back as in the 19th century, unlike their Hungarian counterparts, the Czech elite typically preferred other means of risk assumption to the card table and horse track… The strong vein of thriftiness remains to this day, which is why the Czech Republic is commonly, and for good reason, referred to as the “Singapore of Central and Eastern Europe”. This year, however, there is more to it than simply the Czech Republic’s excellent general creditworthiness. At the beginning of the year, for example, we noted with concern the country’s growing financing requirement as the economy tried to pull itself out of the most severe recession of the past two decades, and found itself faced with falling tax receipts accompanied by rising costs. In July, however, the new government led by Petr Necas, the first in many years to enjoy a legislative majority, introduced measures aimed at substantially reducing the budget deficit, which according to plans will be set on a downward curve in the coming years, to be halved in the space of three years. The entire program is made even more credible by the fact that it promises a substantial improvement as early as next year, as a 10% reduction in government payroll costs, the slashing of maternity and unemployment support and the cancellation of previously announced tax cuts will result in savings totalling CZK 74 billion, or 2% of GDP.

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