For work interview: Fixed Income Strategy - Gathering Dark in the Summer...

[Anastacia]

Fixed Income Strategy: Gathering Dark in the Summer
Strategist’s comment: The rally is over but some ideas left unnoticed
Global markets liquidity went up, so does the sentiment towards Emerging markets. Central Banks and governments’ efforts lead to optimism restoration – who knows whether for long. But we are cautious about global inflationary pressure, that may follow huge monetary supply extend. That’s why talking about investment strategy in Ukrainian Eurobond market currently we prefer short duration high grade Eurobonds, though offering attractive yields. And in the long-run, if inflationary scenario comes true, it could appear wisely to look to equity rather than to fixed income instruments.

After spring rallying, Ukrainian Eurobonds experienced only a slight correction in mid-May and then remained flat-slightly up. The spring rally was supported by global optimism, driven by huge liquidity injections from developed countries governments and central banks, as well as improved sentiments towards Emerging markets and IMF support incoming to Ukraine. But liquidity surplus, which was observed in financial markets, is, as before, unpredictable, and nobody knows whether it lasts for long. However, Ukrainian market, which was hardly undervalued in early 2009 (see PHNC “Ukraine's Credit Ratings and Default. Does the Picture Really Look so Gloomy?” from Feb.26, 2009), did corrected this imbalance.

As for now, we believe the rally is over, as the yields on Ukrainian Eurobond market are already close to pre-crisis levels – and the crisis is actually far from its end. The world economy is in a downward trend, as well as Ukrainian, which is still nosediving. There are some buyers of Ukrainian risk at current levels, but holders still don’t want to sell, BID-OFFER spreads are rather wide. Currently investors even start considering EM to be overvalued, and Ukraine is one of the countries, where it could be felt evidently. The country now stands in front of political turmoil, likely Gazprom-Naftogaz payment problems and the middle of banking crisis. Thus we believe Ukrainian risk should be valued higher than before crisis comparative to global Emerging markets. Now Ukrainian spread has reached its seven-months low, this is even slightly more optimistic than fair evaluation of Ukrainian risk.

This summer will be more or less calm, we believe, without slides or rallying, similar to those in Autumn 2008 – Spring 2009. But it looks like gathering dusk over the fiscal stability and banking system of Ukraine. The big boom could happen as early as August-September 2009, when large amount of sovereign and quazi-sovereign debt (Eurobond issues on $1,250 mln) is to be redeemed and large amount of natural gas should be pumped into underground storages (approx. $3.5 bln funding for this is still to be found). We believe, Ukraine will be able to repay its debt in 2009, but still these months would be a very complex test for the fiscal and economic endurance of the country. Overall, talking about investment strategy in Ukrainian fixed income market, we prefer short duration rather than long duration and high quality rather than high yield. From this point of view Eurobonds of foreign owned banks (UkrSibbank, Ukrsotsbank, Forum Bank) look preferable.

Major upcoming events that could determine market moves include also IMF decision on its third $3.8 bln tranche of $16.5 bln loan to Ukraine: according to Ukrainian Prime Minister Yulia Tymoshenko, it could be given as soon as the end of July, depending on the outcome of the talks. The IMF’s 4-th tranche decision, as well as EBRD participation and other funding from abroad are of importance for public and banking sectors. Among other events we should note several debt restructuring proposals, which are to be accepted or denied this summer. Investors’ attitude to borrowers and further developments (debt restructuring or bankruptcies) will determine the prices on high-yield segment Eurobonds.

[Anastacia]

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Ana