COMMENT: Will Hungary’s buyback of bourse shake off regional lethargy?

COMMENT: Will Hungary’s buyback of bourse shake off regional lethargy?
By Gary Kleiman of Kleiman International December 4, 2015

Hungary’s stock market, with an almost 30% MSCI gain this year through November that outpaced all others with a few exceptions like Estonia and Russia, stands in stark contrast to the negative 10% return of the broader MSCI Emerging Markets index. Foreign investors, who dominate activity on the Budapest Stock Exchange, have been pleased with the country’s solid economic growth and fiscal positions, the exit from deflation, and Prime Minister Viktor Orban’s fulfillment of his pledge to reduce the post-2008 crisis special bank tax. And November provided another reason for optimism when Hungary’s central bank repurchased a 69% stake in the BSE from Austrian owners, promising to revitalize it through “new efficiencies and incentives”.

The move follows the sale by Austria's CEE Stock Exchange Group of its 100% ownership stake in Slovenia’s stock market to its Croatian counterpart with many company cross-listings. Only the Czech Republic remains in Vienna’s cross-border grouping that was launched a decade ago, and it too could soon depart as these exchanges, after drifting into irrelevance for years, return to their grassroots to revive local interest and listings, and set a structural foundation for improved performance.

The Magyar Nemzeti Bank’s (MNB) deputy governor, Marton Nagy, cited low performance in market capitalization and turnover – under 20% of GDP and $6bn in 2014, respectively – as well as the need to attract new listings and local ownership as the main takeover reasons.  

The renationalization strategy follows a similar line taken toward Hungary’s banking sector, foreign currency loans and private pensions, but marks a departure from Prime Minister Orban’s previous blanket condemnation of the equity market as a “roulette table”, which he used as partial justification for raiding the country’s private pensions.

Hungarian Minister of National Economy Mihaly Varga stressed the need to develop more activity on the stock market, which has seen only 35 new entrants in the past 15 years and a 70% drop in trading volumes between 2010 and 2014. Three listings – oil and gas group MOL, drug maker Gideon Richter and banking group OTP – have long been the main focus; an attempt to add another large cap stock, budget airline Wizz Air, failed earlier this year when it chose to list in London instead.

All this has been disappointing for Hungary, which was the original post-communist exchange and had the region’s first privatization programme to drive supply. But stagnation had set in by the mid-2000s, leaving it ripe for the wave of regional consolidation that brought it into Austria’s fold. The exchange’s outgoing CEO, Zsolt Katona, said in an interview on October 28 that he foresees ten IPOs annually, assuming a renewed push to sell of state-owned enterprises such as bank, energy, postal and lottery holdings. Road hauler Weberer could resume its listing process, while leading realtor Duna House is due to be added in December. Even with this spurt, the BSE still pales in comparison to the regional giant of the Warsaw Stock Exchange, which has dozens of new listings each year.

Hungarian officials argue that small and mid-sized firms should have better capital market access in parallel with dedicated bank lending under the government’s $2bn “Funding for Growth” facility, which will expand another 5-10% in 2016. The authorities have also moved to clean up the brokerage sector after the collapse of Quaestor and other participants, at an annual customer reimbursement cost of $100mn over ten years. Banks must pay that tab even as they try to boost minimal after-tax profits, which could be aided by securities promotion measures to be unveiled in a February package. Another interest rate cut to mirror the additional Eurozone quantitative easing, and likely regaining of a sovereign investment-grade rating could also enhance the equity environment.

Regional setbacks

Hungary’s ambitions are in contrast with Poland, where the MSCI index was off 25% through November after consecutive presidential and parliamentary election victories by the populist Law and Justice. Its possible agenda includes a special bank tax, further grabbing of private pensions and a halt to privatization, combined with rhetoric that routinely excoriates stock market “speculators”.

The new government, which drafted in a leading banker as deputy prime minister for the economy, has already confronted the collapse of SK Bank and a top cooperative lender, and is scheduled to replace almost all the central bank monetary policy council members in the coming months. An immediate priority will be to realize campaign promises over higher social spending, while keeping within the EU fiscal deficit threshold of 3% and constitutional public debt limit of 60% of GDP. The latter may be in jeopardy should a court ruling invalidate a previous social security takeover of private accounts, but the government could respond with more sweeping action to further gut the domestic institutional investor base.

Romania, after President Klaus Ioannis’ surprise triumph earlier this year, had a plan to modernize its stock exchange with the aim of challenging Warsaw in particular and gaining core MSCI status. However, this has since been subverted by continued political infighting and anti-corruption investigations, resulting in the prime minister’s ouster and installation of an interim technocrat government. Until new elections, privatizations in the pipeline will move slowly, especially without a new arrangement with the International Monetary Fund (IMF) – a lack of which helped send the MSCI Frontier Markets Index in dollar terms from positive territory to a 5% end-November decline.

Croatia and Slovenia fell over 10% through the same period, despite their exchange merger seen as a more natural fit than the Austrian combination. Faster state enterprise selloffs could lift future results, yet both countries have hesitated despite high government debt/GDP ratios and continued urging by the EU and IMF. Slovenia’s designation of insurers as “strategic” that must stay in state hands has been criticized for depriving the securities markets of potential commercial long-term holders also able to exercise better corporate governance.

The European Bank for Reconstruction and Development’s (EBRD) latest “Transition Report” offered the first comprehensive financial market development review in a decade, and found both public and private equity strides sorely lacking. The region’s share of global emerging market venture capital has fallen by half, and stock market scores were unimpressive in a range of qualitative and quantitative rankings.

Without a positive model, Hungary’s takeover of its bourse could be an impetuous move, but it could also prove to be bold if it follows through on local savings mobilization, small business access and privatization. The Czech Republic, which remains allied with Austria for now and has followed a similar somnolent pattern since its post-communist launch, could be poised for its own split with Austria, and other regional exchanges would likewise benefit from a next-generation facelift that prompts a fresh global investor look. 


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