Societe Generale has downgraded Hungary to market neutral, saying its macro fundamentals continue to improve, but spread valuations have become less attractive.
Hungary has been outperforming other BBB-rated countries since the beginning of the year, and for valid reason:
GDP growth should reach 3.2% this year (improving from 1.95% in 2016);
current account surplus has been very strong (4.8% of GDP);
the fiscal deficit has deteriorated this year but remains well below the 3% threshold;
public debt/GDP is gradually decreasing and should print below 73% this year.
While external debt remains elevated (120% of GDP), SocGen stressed that “very substantial progress" has been made on that front (five years ago, EXD/GDP was close to 160%).
Nevertheless, after 9 months of outperformance, Hungarian spread valuations have become less attractive - especially the USD 2041, which appears as one of the most expensive EM sovereign bonds.
SocGen sees limited value in the short end, noting that the USD 2020 and the USD 2021 are trading 8bp to 10bp cheap to fair value, and that the new 10Y EUR-denominated bond is trading 30bp expensive. Hence, SG cut Hungary to market neutral, from overweight.
