Gyorgy Palfi (VIG AM) on Bloomberg:
2024-06-26 By Veronika Gulyas and Marton Kasnyik (Bloomberg) – Record-low valuations compared with emerging-market peers, growing company profitability and an expected domestic savings shift into equities are tempting investors to reconsider their approach to Hungary’s equities.
The local BUX index is trading near all-time lows relative to the MSCI EM benchmark in proportion to earnings, and at a roughly 35% discount to Warsaw’s WIG20 index. At the same time, major Hungarian stocks have seen a surge in earnings that leave their Polish peers in the dust.
In the meantime, a chunk of the $7 billion of retail bonds maturing over the next 10 months will be likely headed into local stocks as Hungary’s inflation drops along with yields on new debt, according to calculations by Budapest-based broker Concorde Securities Zrt. “We expect around 10%-15% of this amount to potentially be channeled into Hungarian equities,” Concorde analyst Gabor Bukta said. “This is rather positive for the BUX, where negative factors are already priced in.”
The BUX’s deep discount is rooted in regulatory and political risks, with Premier Viktor Orban’s administration repeatedly tweaking rules to extract more revenue from companies. These concerns are unlikely to go away as public finances remain strained and access to European Union funding limited due to conflicts with Brussels over the rule-of-law.
“Sector and extraordinary taxes are still very high and there’s a looming risk that some of these taxes will remain in place as the budget needs to be adjusted,” said Gyorgy Palfi, a portfolio manager and head of equities at VIG Asset Management Hungary. Exchange-rate risk stoked by “macroeconomic imbalances” is also a hurdle for foreign investors.
Orban’s regime has done relatively little to shore up Hungary’s capital market, while the bourse has seen just two initial public offerings in the last five years. Instead of focusing on enticing more institutional money, it’s often the premier’s family and friends who have emerged as leading deal-makers and investors.
The BUX has already been trading near record-highs after gaining as much as 9% in dollar terms this year, a similar performance as the WIG20 and more than the EM benchmark. Valuations and fresh inflows of funds may spur further gains.
Falling Yields
In past years, Hungarian savers had flocked to inflation-linked retail notes to seek protection from rampant price rises. But as inflation dropped to around 4% from last year’s peak of 25.7%, returns are no longer as enticing for household bondholders. At the same time, Budapest’s four largest stocks are
profitable and all but refiner Mol Nyrt. showed rising net income for the first quarter. OTP Bank Nyrt., which has grown into one of the biggest lenders in eastern Europe, posted a 23% profit jump compared with a year earlier. Pharmaceutical firm Richter Gedeon Nyrt., once mostly known for generics, has seen a sale surge from its blockbuster Cariprazine drug and is making inroads into the women’s healthcare segment, resulting in a 74% profit increase.
The BUX discount, which is “perhaps higher than justified” versus many other markets “offers a good entry opportunity for investors,” said Patria Finance analyst Norbert Cinkotai. His colleague Szabolcs Grebel expects the BUX to rise 15% by the end of 2024. VIG’s Palfi echoed the sentiment by saying that the currently high profitability of listed companies is “sustainable, which we assume isn’t priced in.”
Nevertheless, regulatory risks remain an issue. In May, the government said it would have re-imposed a fuel price cap if retailers, led by Mol, didn’t cut prices at the pump. The cabinet also said it’s considering whether to cancel an extra-profit tax on pharmaceutical firms, such as Richter, and last week Orban said he may pass new levies on companies that he considers financiers of the war in Ukraine.
“Another tax or new restrictive measures can come anytime,” Concorde’s Bukta said. This makes it harder for investors to buy into the Hungarian stocks story and “otherwise good profitability outlook.”
https://www.bloomberg.com/news/articles/2024-06-26/flows-from-bonds-stir-interest-in-hungary-s-lowly-valued-stocks?sref=7ZmMyB6K
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