How To Invest In Hungary

Budapest Stock Exchange Index (BUX) – up over 70% Since January 2015

Foreign investors can access the Hungarian stock market primarily through emerging market equity funds, either actively or passively managed. Some of the largest are provided by OppenheimerFunds, Vanguard, American Funds and Lazard.  Given that the Budapest Stock Exchange is dominated by three large companies (OTP Bank, Richter Gedeon, and MOL), investors can seek funds with large holdings of these companies and effectively replicate the stock exchange.  MOL is available as an ADR in the US, as are two other smaller companies (Forex and Magyar Telekom).

Given its outstanding large stock of debt, Hungary has a rather deep local bond market.  Again, Hungary represents a large weight in many local currency emerging market bond funds.  Like elsewhere in the world, Hungarian bond yields are low.  With such low inflation, Hungary’s central bank is likely to cut rates further, and use extraordinary measures to keep bond yields as low as possible. Hence, investors may not enjoy much yield, but they could capture some capital gains as the year progresses.  As Hungary’s bond yields converge with Poland’s, investors may not flock as much as they did in the past.

Hungary 10 Year Swap Yields (%)

The currency is quite difficult for the foreign investor to gain unique exposure to.  While Hungary’s forint is liquid and convertible, it appears less frequently on currency trading sites.  However, investors who access either the equity market or the local currency bond market will gain exposure to the currency as well.  The forint is likely to be subject to appreciation pressures from positive fundamental drivers in 2016, though the central bank will continue to fight this with all ammunition possible.  Traded most often against the euro, the forint attracts flows and appreciates when the European Central Bank eases monetary policy, unless the Hungarian National Bank acts accordingly.  As such, over the longer term this year the currency will probably remain stable to slightly stronger versus the euro.

While Hungary’s markets are small, they are still significant in almost all emerging market indices.  While the government still needs to make progress on debt reduction, the economy has emerged successfully from the abyss.  With a move back to investment grade ratings in the future, Hungary’s asset classes will likely perform more like developed markets than emerging.