Waking Hungary’s zombie bourse

Waking Hungary’s zombie bourse
Budapest Stock Exchange, which is now under the control of the central bank.
By Tim Gosling in Budapest March 21, 2016

The Budapest Stock Exchange may have been one of the best performing bourses in the world in 2015, but hardly anyone noticed. The BUX index gained 40%, but four stocks constitute over 95% of its weighting, while monthly equity trading turnover struggled to break €1bn – hardly a story to set the pulse racing. However, a state takeover of a stock exchange is enough to give anyone a jolt.

The Magyar Nemzeti Bank, the central bank headed by Prime Minister Viktor Orban’s sidekick Georgy Matolcsy, bought full control of the BSE from Austria’s regional exchange operator CEESEG in November. Architect of the Hungarian government’s “unorthodox” economic policies in his former role as finance minister, Matolcsy is currently leading a similar approach to monetary policy at the MNB. The central bank also runs a couple of large commercial banks that the state acquired in recent years, and they are central to its plan to breathe new life into the BSE.

While state control of a stock exchange is incongruous to say the least, analysts are not overly negative for the meantime. “The market is mainly dormant,” points out Tamas Moro, head strategist at Concorde Securities in Budapest, “so any change is welcome really.”

Yet apprehension is evident also. The purchase certainly came out of left field; Orban and Matolcsy have hardly encouraged a thriving equities market over the past six years or so with erratic policymaking and a statist outlook. The PM condemned the equity market as a “roulette table” in 2010 as he dismantled the country’s private pensions.

However, having infuriated foreign investors by forcing them to help reduce the deficit and state debt, and endure a painful clean up at the banks, the pair now hopes to persuade them to lend a hand in opening up the capital markets to Hungarian companies. “The government now seems to understand that economic growth requires healthy growing companies, and that the stock market has a vital role to play,” Moro points out.

The MNB and BSE will spend this year building the regulatory framework to improve the listing process and support smaller companies looking to float, Marton Nagy, vice governor of the MNB and new chairman of the BSE, tells bne IntelliNews. “A stock exchange is not a normal company,” he asserts. “The former ownership was a problem. It put short-term profit before market development and the Hungarian capital market was dying.”

Big splash

The new board at the BSE announced on March 9 the approval of a new strategy for 2016-2020. The leading edge will be IPOs from state-owned companies, which will help boost the liquidity on the market and lift the total market capitalization to 30% of GDP from the current 15% or so.

The bourse saw just 35 or so new listings in the past 15 years, while turnover dropped 70% in the four years to the end of 2014. The BSE badly needs large and successful deals to kick off the process and attract attention from both the sell and buy side, Balazs Bozsik, marketing director at the BSE, tells bne IntelliNews. Nagy hopes to see at least five IPOs per year between 2016 and 2020.

The two state banks – MKB and Budapest Bank – are the clear candidates to make the required splash. However, after that, the field rapidly shrinks.

Hungarian Post and the national lottery appear to be next on the conveyor belt, but will struggle to get pulses racing. “They’re not really growth stories,” admits Bozsik, “but could be dividend plays.”

There are also suggestions that state-power holding MVM could be on the list, though that’s a regular piece of speculation. “We hear talk of a potential IPO for MVM every few years, but have always remained state-owned,” the energy group’s deputy CEO, Attila Bally, told bne IntelliNews in February, before adding, “it’s not our decision of course.”

MVM would likely prove a tough sell in today’s climate, as the company is driven purely by state needs rather than commercial goals. It would take a brave investor to venture into direct partnership with a government that has declared it wants energy to become a non-profit sector. “The regulatory risk is high,” Concorde Securities' Moro notes, adding that the global perspective is hardly any more enticing, pointing to low energy prices.

Overall, the new management at the BSE is eyeing up to 30 state companies as potential candidates to list over the next five years, the marketing director says. That, the exchange hopes, will pave the way for development of a thriving market for larger privately owned Hungarian companies. Road hauler Weberer and realtor Duna House, which both postponed IPO efforts last year, are thought to be prime candidates.

More than one analyst suggest agriculture could offer candidates, with heavy investment going on in the sector currently. There are also several large car parts suppliers growing on the back of Hungary’s increasing production for export by the likes of Audi, Suzuki and Mercedes. Bozsik says the bourse has a list of targets either eyeing regional expansion or whose owners may be looking for an exit. “The government has seen in the past the sale of large Hungarian companies to foreign investors,” Moro points out. “It now wants them to remain Hungarian by offering domestic financing. There are lots of companies making several billion forint annually that could have a market capitalization of €100mn-200mn.”

The challenge facing the BSE is to convince them that the cost and demand of going public are worthwhile. Most large Hungarian companies are currently sitting on large cash piles, points out Gergely Tardos, head of research at OTP Bank, which is limiting demand for bank credit. Securing a bank loan is, of course, a much easier and cheaper process than an IPO.

That’s an issue even more acute for the third set of candidates the BSE is targeting: small businesses. Small and medium-sized enterprises (SME), which will eventually make up the bulk of names listed on the bourse according to the plan, will need to be persuaded and educated about the benefits of listing, Bozsik admits.

On top of plans to build new infrastructure and regulation to help smooth the process, the BSE will work closely with financial advisors to help convince smaller companies of the benefits of equity funding. The government is reportedly working on offering tax breaks for companies that do take the plunge.

Two to tango

However, it’s not just IPO candidates the bourse needs to persuade. Investors are curious about the bourse's development plan – and supportive at the moment – but will also be watching closely to see how successful the planned IPOs of the state companies go, Bozsik says. Only then will the BSE win the interest and trust from investors to allow it to press on with the listing of smaller companies.

The issues for investors are familiar from any developing market. A lack of transparency and unrealistic valuations have long dogged the Hungarian bourse. “We must have transparency, and companies must be taught to understand this is advantageous,” Nagy stresses.

“We need good analysis,” Bozsik says. “We will work with the brokerages and research houses should the coverage not be good enough on smaller companies, as well as with the institutional buyers to kick off transactions.” Moro says brokerages are now talking to the BSE and MNB over potential tax breaks for those publishing research on smaller companies.

Yet no one will take that coverage seriously unless the price is right. There’s has long been a huge valuation gap between companies and institutional investors, Moro says, noting that even domestic institutions work globally now. “Hungarian assets have to compete on a global scale,” he warns. Bozsik agrees that the BSE must have IPOs “at reasonable pricing”, but won't discuss how the bourse can achieve that.

Should it succeed, investors are likely to start to forget any worries over the new ownership of the BSE. But for now, the state’s role does stick out. There’s just one other example of state ownership of a mainstream bourse, and that’s China.

Hungary can’t offer the bulk that persuades investors to turn a blind eye to Beijing’s control of the Shanghai Stock Exchange, but Budapest’s ownership is key to building the country’s equities market and a viable bourse, Bozsik insists. That will presumably feature legislation that is more investor-friendly than the recent attempt to free the finances of MNB-owned companies – including the bourse – from public scrutiny. Whether Hungary will be tempted to copy China’s heavy regulation of the stock market remains to be seen.

“We can’t see a better alternative owner at the moment,” Bozsik claims. “A successful revival of the BSE depends on state support via new legislation and infrastructure building. We are also looking at vertical integration – for instance the central counterparty – which would make the company more valuable.”

Once the mission is complete and the bourse resurrected, the state will, it naturally insists, get out of the way. “The BSE should only be in the temporary ownership of the MNB,” Nagy says. “We just need three to five years to rebuild the capital market.”

Bozsik offers a similar schedule. “The BSE must have a new owner eventually of course. We could list it; it would be great to do so within five years.”