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Discussions over the next domino to fall in Europe’s sovereign debt crisis have been happening for months now, with much of the speculation focusing on Spain, Italy, Ireland, and Portugal. Whoever had Hungary in the office pool may be about to cash in big.

Earlier today, a government spokesman in the central European nation warned that the economy had been left in a “grave situation” by the previous administration and that talk of a default “isn’t an exaggeration.” This news came as a bit of a shock, considering that Hungary received a bailout during the credit crisis and that the previous government had predicted a a budget deficit equal to 3.8% of GDP for the year. Even the current administration’s projection at 7.8% seemed relatively tame. While this new figure is more than double previous estimates, it is still very manageable by most estimates and total debt levels are on par with Germany. However, the country is currently the most indebted eastern European country and comments from government officials have left many analysts wondering just what will happen next, especially given the stance of the Prime Minister of Hungary,Viktor Orban, and his staunch opposition to both IMF controls as well as current austerity measures which he feels has left the country mired in recession.

Although there is currently not an ETF tracking the Hungarian economy, the country of Austria looks to be highly impacted by this mess due to its geographical closeness and high level of economic cooperation with Hungary. Currently, there is one ETF that tracks Austria, the iShares MSCI Austria Index Fund (NYSEARCA:EWO) which was down more than 7% in afternoon trading (see charts of EWO here).

Austria ETF In Focus

EWO tracks the MSCI Austria Investable Market Index, which measures the performance of the Austrian equity market and consists of companies that are traded on the Vienna stock exchange. The fund is heavy in financials, which make up about 40% of the fund, with large allocations going towards industrial materials (21%), and energy (10%) as well. The fund has minimal allocations to media, hardware, or health care stocks and holds 37 companies in total.

In terms of market capitalization levels, the majority of the fund is in medium sized companies which make up 51.9% of the fund with virtually no allocations towards giant or micro sized securities. Given the recent turmoil in Europe, EWO has been among the hardest hit funds; it has sunk 21% thus far in 2010 and was is down 8.4% over the past week. Look for this fund to be among the most heavily impacted by any future news out of Hungary (also see Is the Austria ETF In Trouble?)

Disclosure: No positions at time of writing.

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Source: Austria ETF Sinks on Fear of Hungary