Why Hungarian Stocks Are Ready to Rise

There’s lots to like in Hungary, including strong capital inflows, fast economic growth, low borrowing costs, and a much-improved banking sector. All should help boost local stocks.

“Higher bank profits should improve banks’ ability to ramp up lending and give more support to output growth and investment,” says Ugras Ulku, deputy head of emerging market Europe research at the Institute of International Finance (IIF). “Banks are well capitalized and they have made significant progress in reducing [nonperforming loans] over the past couple of years,” he says.

There are no Hungary specific exchange-traded funds available to U.S. investors, but you can access the market by purchasing large-cap stocks that comprise the Budapest Stock Exchange’s local index, the BUX.

Among the stocks to consider are three that make up the MSCI Hungary Index. They include the largest Hungarian energy company MOL (MOL.Hungary), which yields 4.2%; the country’s largest bank OTP Bank (OTP.Hungary), which yields 2%; and biotech Gedeon Richter (RICHTER.Hungary), which yields 1.25%. Investment firms like Interactive Brokers are usually able to facilitate trading in foreign stocks.

The MSCI Hungary index now trades at a forward P/E of nine, its lowest point in more than three years, down from a peak P/E of 14 in 2015, according to data from Yardeni Research. That compares favorably with the forward P/E of 11 for the MSCI Emerging Markets index.

Emerging markets like Hungary that haven’t kept pace with the rest of the group will eventually begin to outperform, according to recent research from HCWE & Co. The MSCI Hungary index fell 11.3% in the year through September, versus a drop of 7.7% for the broader MSCI Emerging Markets index. HCWE ranks Hungary the most favorable emerging market in Europe for investors.

The Hungarian economy is booming and should continue to grow. Annual gross-domestic-product growth hit 4.8% in the second quarter, versus 3.3% a year earlier, according to data from TradingEconomics.com. The IIF sees growth averaging 4.5% this year and 3.5% next year. That slowdown still puts Hungary way ahead of likely growth for the euro zone, which saw 1.7% growth in the third quarter.

At 0.16%, inflation-adjusted, or real, lending rates between banks are low, which is good for stocks. U.S. investors saw massive gains when the Federal Reserve kept rates low after the financial crisis. “Hungary’s policy interest rate is the lowest among its peers and in the CEE [Central and Eastern European] region, and substantially negative in real terms,” says IIF’s Ulku.

Capital is flowing into the country apace in the form of loans from international investors.

The country’s credit rating is due for a small lift, which should help bolster the currency, the Hungarian forint. Brown Brothers Harriman estimates an implied rating of BBB versus one of BBB-minus from S&P. “This suggests some modest upgrade potential,” states a recent Brown Brothers report. BBB-rated bonds are considered investment-grade securities, whereas those lower than BBB-minus are not.

There are risks. Hungary is an emerging market. That makes it vulnerable to swings in sentiment on the entire sector, with the real possibility that investors will suddenly dump their holdings. The low interest-rate policy also makes the currency somewhat susceptible to a depreciation. But given solid growth prospects, a cheap market, and nice dividends, the reward seems worth the risk.

about 1 year conditional positive

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