In Hungary the signs point to recovery. The small Central European country has been hit hard by the corona pandemic. With 3,100 deaths per million inhabitants, Hungary has one of the highest numbers of victims in terms of population size. But the Hungarian economy is euphoric in the second quarter of 2021 with record-breaking growth. It’s the fourth quarterly growth without a break. Regardless of the fear that a fourth wave of pandemics is looming, economists believe that the gross domestic product will grow by more than seven percent for the entire year. This would enable the country to return to the growth it had before the outbreak of the disease in 2019. At that time it was the engine of the region. The economic recovery is being driven primarily by the strong growth in consumption and gross fixed capital formation. Exports are also picking up again significantly. Since private consumption and investments increase the demand for goods from abroad to a considerable extent, imports also increase sharply.
The difficult relations between the national-conservative government and the EU are unlikely to have a positive effect. Because of their rigid stance, there is still a risk that legislative initiatives and doubts about the rule of law on the part of the EU lead to the delay or suspension of funding. That is fundamentally negative for the market. Currently, the delay in the approval of the investment plans for the pandemic stimulus is a good example of this, as Henning Eßkuchen, analyst at Erste Group, explains. The EU Commission pointed out that the new rule of law mechanism is currently still being reviewed by the European Court of Justice and that the first hearing is scheduled for the first half of October. So there will be no judgment before the end of the year.
In the end, it is unlikely that Hungary will face concrete EU sanctions in the foreseeable future or even until the elections next year, says Tatha Ghose from Commerzbank. A final hurdle could be an expert opinion prepared by the EU Parliament’s legal committee to urge the EU Commission to act more quickly. However, Commerzbank does not consider this to be promising.
Tighter monetary policy – euphoric stock market
Notwithstanding this, the government is pursuing a strict budgetary consolidation goal. The central bank in Budapest (Magyar Nemzeti Bank, MNB) initiated a turnaround in the early summer after years of ultra-loose monetary policy in the face of inflationary pressure and raised the key interest rate in several steps. The last time there was an increase at the end of August. Following the remarks made by Lieutenant Governor Barnabás Virág, the message was conveyed that the MNB will continue to hike rates until inflation has stabilized within the target range. Bernd Maurer, an analyst at Raiffeisen Bank International, also sees further rate hikes as realistic as long as inflationary pressure persists. This has proven to be stabilizing for the national currency, the forint. Companies with foreign currency risk are usually well hedged (such as the petrochemical specialist Mol), and for the banking industry an outlook on rising interest rates is only beneficial, as Erste Group notes.
Despite the tighter monetary policy, the stock market is showing itself to be euphoric. Since the beginning of the year, the leading index of the Budapest Stock Exchange BUX has done well in line with the markets and gained around a quarter. The bull market has to be seen against the background of the composition of the leading index. After all, a quartet of flagships represent nine tenths of the barometer. These stocks and the others delivered record earnings in the second quarter. Apart from the heavyweights, the Budapest parquet consists practically only of small and medium values. Ultimately, this reflects the small size of the Hungarian economy. Against this background, one has to judge the favorable valuation on the market. Erste Group estimates the price / earnings ratio (P / E) at 9.3 over a twelve-month perspective, somewhat more favorable than that of the region.
Due to the concentration of the index on a few stocks, Raiffeisen Research does not make an index estimate for Hungary. Magyar Telekom shares are recommended as “Buy”. Digitization is a driver here that will also receive impulses during the pandemic. Erste Group also continues to view the blue chips positively. Further growth in the BUX by five to ten percent at the end of the year is quite realistic for Henning Eßkuchen. After a long period of sluggish issuance, the stock exchange itself could probably go public at the beginning of next year. The state electricity supplier MVM is reportedly also preparing for a public notice. Here, too, things should become specific at the beginning of next year.