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Global Investment Guide: How To Invest In Hungary

This article is more than 7 years old.

Hungary has come through the financial crisis as somewhat of an unusual success story.  As the country entered the Great Recession saddled by the largest external debt burden in the European region, its bonds, equity markets and currencies took a major hit which lasted years.  Hungary became the country that analysts loved to hate, as the poor economic outlook was compounded by a massive leverage problem in households, the financial sector, and the government.  Instead of following an orthodox rulebook for crisis management, the newly elected government led by Viktor Orban ignored widely accepted macro policy advice, and proceeded to use a host of unusual measures that were not market friendly, but have seemed to work for the economy in the longer run.

Fast forward to 2015-2016, and Hungary has enjoyed one of the highest growth rates in the region, for both developed and developing countries.  It took several years to bring down household debt levels and stabilize the consumer, and since Hungary is closely tied to western Europe, malaise there carried through locally.  As Germany’s economy picked up, Hungary’s began to follow suit.  Hungary has also benefitted from record low interest rates at home.  An absence of inflation in the European region combined with low oil and food prices has brought Hungary’s inflation close to zero and spurred the central bank to cut interest rates yet again.  A policy interest rate of 1.2% is amazingly low relative to the country’s historical context.  Low rates and low gas prices continues to support the Hungarian consumer.

Hungary GDP Growth Rate (%)

Source: Bloomberg

While debt levels remain high, they have been falling quite dramatically.  First, the weak currency from 2008-2015 helped curb Hungarian’s appetite for imports.  Second, the government has restrained spending, generating a primary surplus and enacting a strict policy to reduce national debt denominated in foreign currency.  As a result, Hungary has entered a coveted “twin-surplus” situation on its current account and (primary) fiscal accounts – a far cry from its situation in the run-up to 2008.

Looking forward, the country is poised to keep growth decently high (2% or a bit higher) for the coming year.  The economy faces a few obvious risks: issues regarding the refugee crisis and any additional fallout from the Volkswagen drama.  Hungary has staunchly refused to cooperate with Europe on the refugee crisis, much to the dismay of its neighbors. The fallout is still uncertain. The country also hosts large automobile manufacturing sites, and provided a significant number of the vehicles that were affected by the Volkswagen emissions scandal. Again, the economic impact could be significant in terms of jobs or industrial output, but it yet uncertain.

In terms of investments, Hungary’s equity market (the Budapest Stock Exchange) has had an amazing run from 2015 to the present.  The market really took off in the fourth quarter of 2015, as positive factors affecting the biggest companies came to fore.  The Prime Minister also pledged to cut bank taxes, and the rating agency Fitch signaled a positive outlook on the country’s debt ratings.  Fitch’s move to bring Hungary back to investment grade status is expected by May 2016, and likely foreshadows the another agency (Moody’s) similar move later this year.  If Hungary achieves two investment grade ratings, it will likely attract a significant amount of new capital inflows.  Finally, further interest rate cuts in 2016 should remain supportive of the equity markets.  If Germany’s economy improves, Hungary’s will likely follow suit.

Budapest Stock Exchange Index (BUX) - up over 70% Since January 2015

Source: Bloomberg

Foreign investors can access the Hungarian stock market primarily through emerging market equity funds, either actively or passively managed. Some of the largest are provided by OppenheimerFunds, Vanguard , American Funds and Lazard.  Given that the Budapest Stock Exchange is dominated by three large companies ( OTP Bank , Richter Gedeon, and MOL), investors can seek funds with large holdings of these companies and effectively replicate the stock exchange.  MOL is available as an ADR in the US, as are two other smaller companies (Forex and Magyar Telekom).

Given its outstanding large stock of debt, Hungary has a rather deep local bond market.  Again, Hungary represents a large weight in many local currency emerging market bond funds.  Like elsewhere in the world, Hungarian bond yields are low.  With such low inflation, Hungary’s central bank is likely to cut rates further, and use extraordinary measures to keep bond yields as low as possible. Hence, investors may not enjoy much yield, but they could capture some capital gains as the year progresses.  As Hungary’s bond yields converge with Poland’s, investors may not flock as much as they did in the past.

Hungary 10 Year Swap Yields (%)

Source: Bloomberg

The currency is quite difficult for the foreign investor to gain unique exposure to.  While Hungary’s forint is liquid and convertible, it appears less frequently on currency trading sites.  However, investors who access either the equity market or the local currency bond market will gain exposure to the currency as well.  The forint is likely to be subject to appreciation pressures from positive fundamental drivers in 2016, though the central bank will continue to fight this with all ammunition possible.  Traded most often against the euro, the forint attracts flows and appreciates when the European Central Bank eases monetary policy, unless the Hungarian National Bank acts accordingly.  As such, over the longer term this year the currency will probably remain stable to slightly stronger versus the euro.

While Hungary’s markets are small, they are still significant in almost all emerging market indices.  While the government still needs to make progress on debt reduction, the economy has emerged successfully from the abyss.  With a move back to investment grade ratings in the future, Hungary’s asset classes will likely perform more like developed markets than emerging.

This article is part of a series called "The Global Investment Guide: How To Invest In 25 Countries Around The World," where I take readers on a voyage through the current investment landscape of the largest developed and emerging economies. For each country, I discuss the investment climate in terms of the macroeconomic and policy situations, the investment outlook across asset classes, and also indicate typical investment vehicles for accessing exposure to these countries.

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