Interesting currency/bond deal


Jyske Bank (Denmark's third largest bank) recently announced a bond investment that has an interesting twist. The bond is backed about 85% by other bond investments, but the remaining 15% is backed by an equal investment into the Euro Stoxx50, S&P 500 and Nikkei 225 indexes. This investment is available till February 14 and guarantees at least your money back, but could bring a much better than normal bond return because the yield is based on the performance of the three share indices.

This new bond is called World III 2006 and is an alternative to this time of low interest rates.

The investment is denominated in your choice of Norwegian kroner or Hungarian forints.

The return on the Norwegian kroner bonds is 90% of the rise in the three indexes. For example, if they were to rise 30% over the next three years, the bond would pay your money back plus 27% profit. However, if the indices do not rise (let's say stock markets fall further) then you are guaranteed the original value of the bond.

The University of Louisville, Kentucky interestingly has a full set of economic statistics about Norway at http://www.ssb.no/english/subjects/00/00/10/economic-indicators/

There is also a host of Norwegian information in its World Fact book from no less than the CIA! You can see this at http://www.cia.gov/cia/publications/factbook/geos/no.html

This book is a year behind (let's hope the data they feed our world leaders is a little more current!), but you can get the most up to date economic data from geoinvestor.com at http://www.ssb.no/en/indicators/ There are a ton of links ranging from farming data to what the currency is doing, etc.

The forint bonds pay an even better deal at 103% of the rise of the indices. In other words, if the three indices rise 30% in the next 3 years, then you receive a 30.90% return. Yet the no loss guarantee still applies.

However, there are three main risks. The first being in the currency. If the Norwegian kroner or Hungarian forint fall versus your base currency (ie. U.S. dollar, or Euro or yen or British Pound, etc.), then you will lose whatever the parity drops. On the other hand if the kroner or forint parities rise, you make an extra profit. The Norwegian currency has quite some stability because Norway is an oil rich nation and has a huge reserve fund as well as steady income from oil. This currency should prosper especially if there is continued turmoil in the Mideast.

The forint does not have the same economic stability, but Hungary's along with Poland and the Czech republic are three of the stronger eastern European economies. Their entry into the European Union is also a strengthening factor.

Hungary's economy (based on its 2001 year ending accounts) is still growing in the high 3% range and unemployment is in the modest 5% range. Inflation is around 9% more than I would like to see. This would suggest about a 4% drop in this currency's value versus the U.S. dollar over the next three years. The Hungarian government sovereign debt has dropped 50% in the past three years which is a very positive sign and its trade balance has remained stable (compared to the U.S. hitting records highs, quarter after quarter). This suggests strength in the forint. Moody's credit rating has risen from Baa1 to A3 which is also a good sign. I would be happier making a recommendation if the year ending 2002 accounts were available.

You can get an economic analysis from Hungary's Program Development Department of the Ministry of Economic Affairs at http://www.gm.hu/kulfold/english/economy/huneco-2001-q4/index.htm

There is an excellent monograph published by Columbia University Press entitled Evolution of the Hungarian Economy 1848-2000. This book provides a comprehensive description and analysis of the Hungarian macroeconomic situation through the decade of transition, that is, the development from planned to market economy, as well as the integration into the world economy. Anyone who wants to invest substantially in this country would enjoy this book.

It can be ordered online at http://www.columbia.edu/cu/cup/catalog/data/088033/0880334924.HTM

The American Hungarian Chamber of commerce has some excellent insights about the forint saying "Hedging foreign currency risk is becoming more common among companies operating in Hungary as many realize the potential dangers deriving from the forint's fluctuation. Recent macroeconomic data may suggest that the forint's one-way trend towards strengthening is over for the time being, but many analysts nevertheless remain optimistic. The short-term outlook for the forint has however become cloudier as disappointing macroeconomic data showed Hungary's deterioration in fiscal balance."

You can read the entire article at http://www.amcham.hu/BusinessHungary/16-08/articles/16-07_26.asp

You can also get a huge number of Hungarian news and economic links at AOL users

The second risk is the time value of your money versus inflation. If the stock markets do not rise, you get your original investment back in three years, but the purchasing value of these funds may have fallen. The upside you will at least get the original investment back. That's saying a lot more than what investors have experienced in past years.

Finally, the third risk comes if you need your money back before the three year expiry dates. Jyske Bank makes a market in the bonds so you can liquidate at any time, but only at the current market value at that time. In other words, there is no guarantee against loss on early liquidations. On the other, if market takes a short term run up, one may want to take an early liquidation!

One final cost is a front-end cost of 1%. The minimum investment is about the equivalent of US$7,000.

Most investors should consider having a portion of their portfolio diversified in Eastern Europe and Norway. Those who do may find this an interesting way to get more than normal yields from an investment bond.

For more detailed investment contact Jyske bank's Thomas Fischer at FISCHER@jyskebank.dk

Until next message, Good investing!

Gary


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