Hungary gearing up for polls
Hungary is gearing up for parliamentary elections in 2018. All things remaining the same, a state going to polls is generally a good time for its residents and investors. Governments try to go all out to please both groups.
Given the fact that the Magyar Nemzeti Bank – Hungary’s central bank – is determined to maintain its base rate at its current level, unconventional tools are pretty much the only option the central bank has in order to reduce borrowing costs, stoke inflationary pressures, and stimulate the economy.
In order to support the efforts of the central bank, fiscal stimulus from the government has been substantial as Prime Minister Viktor Orban gets ready for elections in 2018. This can be expected to continue.
Unconventional monetary policy
Unconventional monetary policy has been in effect for quite some time in Hungary. Central bank Governor Gyorgy Matolcsy has been using them since taking over at the helm of the bank in 2013. Some of the tools used by Matolcsy include providing zero-interest funding to commercial banks in order to increase lending activity, and using the three-month deposit facility as benchmark in place of the earlier two-week while keeping its level unchanged, among others.
One of the reasons that Matolcsy is undertaking unconventional measures, instead of rate cuts, to stoke inflationary pressures is to avoid having to reverse the cuts if the economic situation so demands. Frequent changes to the base or key rate of a central bank jeopardizes its credibility.
Should you invest in Hungary?
Hungarian equities have had quite a year. The MSCI Hungary Index is up ~30% in YTD 2016. Massive monetary and fiscal stimulus has contributed a lot to this rise in stocks.
Even rating agencies are seeing the nation favorably. Rating major S&P had upgraded Hungary’s credit rating to BBB-, or investment-grade, from junk in September this year. It cited the country’s current-account surplus, fiscal prudence and reduced susceptibility to exchange-rate swings as the primary reasons for the upgrade. Fitch had upgraded Hungary’s credit rating to investment-grade four months earlier than S&P.
Even after a tumultuous year for global stocks and currencies, the Hungarian Forint has been in a relatively tight range against the Euro, as shown in the graph above.
There are no dedicated ETFs available to US investors for investing in Hungary. The Oppenheimer Global Growth Revenue ETF (RGRO) has 10% of its assets invested in Hungarian stocks – the highest among ETFs investing in the country. The Cambria Global Value ETF (GVAL) is the only other ETF which has over 5% of its portfolio comprising of stocks from Hungary.
The upcoming elections and the fiscal and monetary stimulus may make Hungarian stocks an interesting, even though only peripheral, investment option.