Global Stocks Outperformer Hungary Is Now Even More Attractive

(Bloomberg) -- After half a decade of stellar performance, the Hungarian equity market is only becoming more alluring.

Souring global sentiment has made stocks in the ex-communist country the cheapest since 2013 even as the outlook for Hungarian company profits keeps improving. The BUX Index now trades at 8.6-times estimated earnings, on par with frontier-market Romania and compared with the 11.5-times ratio for the MSCI Emerging Markets Index.

The mismatch between reduced market valuations and upbeat prospects for local businesses makes Hungarian stocks likely to outperform in the longer term, according to Norbert Cinkotai, an analyst at KBC Equitas Zrt. in Budapest. Rapid growth in wages and consumption is fueling the fastest economic expansion in the European Union and benefiting companies like OTP Bank Nyrt., the country’s biggest lender, and oil refiner Mol Nyrt.

“Fears related to the trade wars seem to be exaggerated, and that’s why the market is getting cheaper, despite improving earnings expectations,” said Cinkotai. “So the outlook is more favorable in the long run.”

Foreign investors may be deterred by the country’s unappealing currency, which has slumped 18% in the past decade against the euro, three times more than the Polish zloty. The forint is now trading near its weakest on record, and the median analyst estimate is for the exchange rate to stay around that level for at least two more years.

And investors do demand a hefty premium in Hungary, where the government has in the past imposed special bank taxes and nationalized pension funds, and is now facing an EU probe for rule-of-law violations. Attention has shifted toward smaller companies owned by allies of Prime Minister Viktor Orban, such as Opus Global Nyrt., which accounts for just 2.7% of the BUX but whose share price has jumped 16-fold in five years.

KBC Equitas doesn’t issue trade recommendations for Hungarian stocks, but the brokerage estimates the “fair value” of OTP Bank to be about 13% above the current price. It’s even more bullish on Mol, seeing 23% of further upside. The two companies have a combined 67% weighting in the Hungarian benchmark, and most analysts tracked by Bloomberg recommend buying them.

While the BUX Index is trading about 10% below its all-time high reached this April, it is still 117% higher than five years ago, making it the fourth-best performer among all emerging and developed markets tracked by Bloomberg. That compares with an 8.9% gain for the Stoxx Europe 600 Index, a 12% drop for the MSCI Emerging Markets Index, and a 15% slump in Poland.

To contact the reporters on this story: Veronika Gulyas in Budapest at vgulyas@bloomberg.net;Krystof Chamonikolas in Prague at kchamonikola@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, John Viljoen, James Cone

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