Stock Trader’s Guide to the Hungarian Election and What’s Next

(Bloomberg) – With Prime Minister Viktor Orban tipped to win a fourth consecutive term in Sunday’s general election, stock market investors in Hungary are already focused on how he will close the fiscal hole created to help his government stay in power.

Although politicians have been silent on the prospects for tax hikes or spending cuts, such measures “seem inevitable” after the poll, according to Peter Oszlay, chief investment officer at Erste Asset Management in Budapest. How they are implemented will determine the direction of stock valuations, he said.

Budapest stocks were among the hardest hit by the Russian invasion of neighboring Ukraine. In US dollar terms, the BUX index lags its emerging market peers, even after rebounding in recent weeks as Orban’s Fidesz party regained a lead over a coalition of six opposition groups. .

The resurgence of opinion polls has heightened expectations of a continuation of the status quo and reduced the risk of a potentially chaotic transfer of power. Fidesz’s popularity has been fueled by a spending spree, including nearly $2 billion in tax refunds for families, increases in pensions and public sector wages.

For investors, it is clear that whatever the outcome of the elections, Hungary will have to reduce its budget deficit and that increasing levies on companies can be part of the solution.

“Anyone who wins the election will be under economic duress,” said Gabor Szocs, senior portfolio manager at Hold Asset Manager. “There is very little room for manoeuvre, with public finances between a rock and a hard place.”

Bank proxy

OTP Bank Nyrt., with a 38% weighting in the BUX index, has long been seen as a proxy investment bet on Hungary’s $156 billion economy. While the stock has rebounded since losing a third of its value in the week after Russia invaded Ukraine, it could reverse the gains, especially if the government embraces austerity.

“Painful steps” are necessary, said Oszlay d’Erste. “Economic growth is expected to slow significantly, which could create a headwind for all local stocks.”

Finance Minister Mihaly Varga signaled the need for a post-election budget overhaul and downgraded this year’s economic outlook. In a boon for OTP, Hungary’s key interest rate is already the highest in the EU, with inflation hitting a 15-year high of 8.3% in February, before the effects of war do not affect prices.

Orban inc.

In power since 2010, Orban has taken over all facets of public administration as well as the wider economy, to the point that critics complain that competition is skewed in favor of Fidesz’s business allies.

Opus Global Nyrt., a conglomerate covering finance, construction, tourism and banking, and 4iG Nyrt., an IT and telecommunications company, were the main beneficiaries of the Orban regime, as they accumulated government contracts and grants in addition to state aid and loans. The growth trajectories of these companies could suffer if the opposition somehow defeats Fidesz on Sunday, Szocs said.

An opposition victory could prove messy with Orban’s party so entrenched in positions of power. It could, however, help Hungary access European Union stimulus funds, which have been frozen due to a row over democratic standards.

“Foreign investors could become more relaxed if the new government implements a more EU-friendly approach,” Oszlay said. “However, the uncertainty would also be higher initially.”

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