MOL, emerging currencies

Last week, MOL (Hungary’s largest oil and gas company) and CEZ (Czeck electricity Company) signed a letter of intent to create a strategic alliance and to set up a joint gas-fired power and heat generation business in countries where MOL has refinery operations using fired gas and refinery residuals. The announcement also said CEZ would purchase an equity stake in MOL up to 10 percent in the near future.

According to the local press, MOL's weight will decrease to 30.5% from 37.4% in the index of Morgan Stanley Capital International Inc. ("MSCI") which is a leading provider of equity (international and US), fixed income and hedge fund indices. MSCI has become the most widely used international equity benchmark by institutional investors. MOL's weight in the MSCI EMEA (Europe, the Middle East, and Africa) index is to lower to 1.22% from 1.66%, while Hungary's weight is to shrink to 4% from 4.4%. This is clearly negative to MOL, However, some of the large international investment funds already decreased MOL's weight in their portfolios so we have not seen massive selling pressure coming from large institutional funds.
The main reason for the decrease of the Hungarian oil company in the index is its free float, the number of shares that are freely available to the investing public, which has decreased substantially from more than 60% some months ago to around 40% nowadays. The decrease in free float is due mostly to two major players; MOL and Austrian oil company OMV. As we can recall from the past months, OMV, the Vienna-based oil and gas firm, announced that they had upped their stake in Hungarian MOL to 18.6 percent from 10 percent. The Austrian oil firm said they hold shares of MOL in order to entice closer alliances between the two companies amid energy sector consolidation. In addition, MOL initiated their buy-back program in order to avoid a hostile take-over from OMV. This consisted in buying their own shares in the market in order to reach a majority stake that would prevent any action from players like OMV.
Last Monday, Hungary's central bank kept its benchmark policy rate unchanged at 7.75%, choosing caution in the face of ongoing worries about trouble in global credit markets. Hungary's central bank revised its GDP growth forecast to 2% year on year in 2007 from 2.5% previously and hiked its inflation forecast to 4.5% year on year in 2007 from 3.6%. "The greater than expected slowdown in economic growth and the strong disinflationary effect of the fall in demand continue to represent downside risks," the central bank's monetary council said in a statement last Monday.
"The financial market turbulence stemming from the problems in the U.S. subprime mortgage market has contributed significantly to uncertainty in the global investment environment, leading to a rise in the required risk premium on forint assets," the statement said.

Many emerging-market assets, including currencies such as the Hungarian forint, tend to suffer in periods of global risk aversion, as investors slash exposure to risky assets to cover losses elsewhere. Hungary is particularly vulnerable to sudden shifts in global risk appetite, since foreigners hold 30% of local government debt as claimed by a MarketWatch article (from Dow Jones.)
"It is rather paradoxical that the Hungarian government failed for years to do something about the large imbalances in the economy, and that the markets more less ignored this because of the benign global financial climate, while the forint has recently come under pressure on the back of worsening global credit conditions and despite the Hungarian government tightening fiscal policy last year," wrote Lars Christensen, senior analyst at Denmark's Danske Bank, in a research note.
“As a result, monetary policy might now have to remain tighter because fiscal policy was not tightened when global financial conditions were more supportive” Christensen said.

In a soft landing, (when the economy is growing at a strong rate and the US Fed raises interest rates enough to slow the economy down without putting it into recession), investors say Eastern European currency assets should outperform. Emerging market currencies should outperform if the US enters into a moderate slowdown. However, portfolio strategies are on hold for now as the situation about recession or no recession is unclear, sitting on cash waiting to see the effects of the Federal Reserve's response to recent instability in credit markets.