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Credit Markets

The pace of price increases in Hungary continued to slow in May. The year-on-year inflation rate was 21,5%, below market expectations of 22.3%. Food prices started to stagnate in April and this trend mostly continued in May with a month-on-month increase of 0.1%. At the May rate decision meeting, as expected, the Monetary Council began to normalize interest rates, with a first step of cutting the effective rate by 100 basis points, cutting the ON deposit rate to 17%. This also lowered the upper end of the interest rate corridor, with the ON rate now standing at 19.5%. With monthly cuts of 100 basis points, the base rate and the ON deposit rate could thus converge in September, after which the base rate is expected to remain at 13%. Around the end of the year we may see some rate cuts from the base rate. The forint did not weaken much on the announcement, indicating that the market had already priced in the news. Let’s not forget that foreign investors still have access to the MNB’s 17% weekly deposit, which makes the forint very attractive. Let us also note that the forint yield is still significantly high compared to the surrounding countries.

With the interest rates cut, the yield curve also moved lower during the month. Short yields in particular fell, with the 3-year yield ending the month 26 basis points lower. The long end of the yield curve was mixed, with 10-year yields up 17 basis points and 15-year yields down 24 basis points. The news at the beginning of June caused some renewed turbulence in the bond market. Two new elements were added to the 60% minimum security limit introduced earlier. According to the recent interpretation securities funds may invest up to 5% in debt securities other than HUF-denominated government bonds and must hold 20% of their liquid assets in Hungarian Treasury Bills. The measure led to a sharp increase in demand for Hungarian government bonds at the beginning of the month, and thus to a significant fall in yields. The currently not very bright fiscal situation should thus start to improve in the coming months, but new measures may arise (to prop up revenues or decrease expenses).

Within Asset Classes	Underweight	Slight Underweight	Neutral	Slight Overweight	Overweight
Bonds
Within Bonds
United States
Europe
Emerging Markets
HGB

Equity Markets

As expected, the US fiscal crisis was resolved by the end of May. To an outsider, it was odd that such a thing could happen again after 2011, when everyone knew full well that the US would not declare bankruptcy. If it did, it would have unforeseen consequences that no one would dare to risk. Looks like this had more smoke than flame.
But what was really important in May was how much the US Federal Reserve would raise its benchmark interest rate. The odds of a rate hike have varied several times in the past, depending on the macroeconomic data. Of course, inflation figures and expectations have had the biggest influence on the forecasts, but in the end the Fed has done what the Fed always does. It didn’t surprise the markets, didn’t do anything unexpected, and raised the base rate by 25 basis points to 5.25%. The wording of the Fed’s statement at the post-rate hike briefing was much the same as it was in 2006 at the top of the rate hike cycle, deleting the phrase “FOMC expects further rate hikes are needed”, but there was no mention of the possibility of easing, and the balance could still tip towards tightening. At the same time, the FOMC acknowledged that credit conditions have tightened and that these are likely to put downward pressure on economic activity. Jerome Powell also stated in his press conference that the removal of the reference to further rate hikes is a significant change and that, we got strong hints that the rate hike will end at the 5.25% level under current conditions, but nothing is carved into stone. The decision was not influenced by the debt limit problem and was taken independently of it.
According to Powell, although wage growth is not the primary cause of inflation, it should also fall back to around 3 percent. Corporate margins and profits have widened sharply over the inflationary period – in essence, he cited profit growth as the main cause of inflation – but he expects them to normalize, or fall. Overall, he sees a greater chance of soft-landing than a recession and sees no serious problems in the economy, with events so far apparently not reaching the pendulum threshold for a monetary turnaround, only giving sufficient ammunition to bring it to a halt. The question is, how will the Fed react if the macro numbers start to deteriorate significantly? There are already signs that the slowdown will be more severe than the Fed envisages. According to the Senior Loan Officer Survey, credit demand is weak to a degree not seen since 2009, and some real-time indicators suggest that US GDP growth had weakened quite a bit by early May. We are in for an interesting summer, the question is whether the Fed will cut rates if the macro data erodes significantly.
The Chinese economy does not seem to be immune to the slowdown. Although it showed some signs of recovery in April, this trend reversed in May. China’s Caixin manufacturing PMI, which mainly measures the export/ICT sector, fell to 49.5 in April from 50 in March, suggesting that the trend growth in Chinese industry had stalled by mid-spring and external demand is weak. However, survey respondents expect above-trend growth in the future, especially in the second half of the year, after government support is expected. It is interesting to note that in China, too, the economy is expected to slow significantly without state support. Exports are a little better off as they grew slightly better than expected at 8.5 per cent year-on-year in April, with imports falling by a larger 7.9 per cent, mainly due to the collapse in commodity prices and lower than expected internal growth in China, which helped China’s trade surplus to swell to over USD 90 billion during the month. Chinese firms thus continue to push exports out of necessity, partly with political support, in the face of weak domestic demand. Chinese inflation was just 0.1% year-on-year in April, weaker than expected and a two-year low. The decline in producer prices also deepened, reaching 3.6 percent. This suggests that China may once again be an exporting center of deflation in product prices, with competitive pricing in the international market. China is also not expensive in services, which rose by just 1 percent on a year-on-year basis. It is interesting to note that, for example, Chinese inflation is now much lower than in Japan, an almost unprecedented situation.

The table below shows the Manager’s views on the different asset classes and the weightings within each asset class. Markets have risen a lot since the October lows, which is not uncommon in a bear market. In the US, the May unemployment data came in higher than expected again, which continues to give the Federal Reserve room to raise interest rates further, which in turn gives a greater chance of a recession.

Within Asset Classes	Underweight	Slight Underweight	Neutral	Slight Overweight	Overweight
Equity
Within Equity
Developed Markets
Emerging Markets
Central and Eastern Europe
Brasil
India
China
Turkey
South-Korea
Taiwan
South-Afrika
Mexico
Indonesia

Our Funds and Outlook

In September, investors were already speculating about how long the US Federal Reserve would raise its benchmark interest rate, and when the moment would come when it would decide that it was high enough to contain inflation but not yet push the economy into recession. Since a lower interest rate environment is a prerequisite for a market turn, investors are trying to interpret any macro-economic data in the direction that would support the view that interest rates are already high enough that it is time for the Fed to stop. You can already see in the global economy that high US interest rates are causing serious problems. In September the British financial system almost collapsed when trading in British government bonds stopped, and the Bank of England had to step in to avoid total chaos. Another negative effect of high US interest rates is the strong dollar. This makes it difficult for emerging markets to repay their dollar-denominated debt. At the moment, it looks as if until the Fed communicates that it will not raise the base rate any further, neither the currency nor the equity markets can breathe a sigh of relief.

The following table shows the outlook for the Aegon Hungary Investment Fund Management Company Limited by Shares (Investment Fund Management) focused funds. The positions refer to the month of September, 2022, and depending on the current data and market developments these investments may change significantly.

Privátbankár.hu Klasszis awards:

in 2021

in 2020

in 2019

in 2018

Detailed information on the investment policy, distribution costs and potential investment risks of the funds can be found in the official prospectus and fund rules of the fund on our website. The information provided on this website is only for informational purposes and nothing on this website shall be considered a solicitation to buy, an offer to sell, or recommendation for securities, other financial products or services. Past performance is no guarantee of future performance. VIG Befektetési Alapkezelő Magyarország Zrt. does not take responsibility for the investment decisions made on the basis of this announcement and its consequences.