Tough times ahead

Unfortunately, Hungary faces tough times ahead as it tries to cut the European Union's widest budget deficit. Prime Minister Ferenc Gyurcsány has cut public jobs, raised taxes and slashed subsidies to trim the shortfall.

Last week we also saw important macroeconomic data come for Hungary, which indicate the rate of growth of its economy and the inflation.

Hungary's preliminary third quarter growth in GDP (Gross Domestic Product) data of 1% came significantly below the market consensus of 1.55%, says Reuters. Adjusting with the calendar effects, the figure showed a 1.1% rise year on year.

In our view, the weak GDP data might sustain rate cut expectations. However, the latest comments from the Hungarian National Bank (MNB) suggests that it is still concerned about higher inflation figures (due to the rise in food prices, and 2008 wage agreements.)

The CPI (consumer price index, a measure of inflation) data for October was 6.7%, higher than market expectations of 6.3% (again, as reported by Reuters), and up from the previous figure of 6.4%, year on year, in September.

The MNB will, therefore, have difficulty lowering interest rates, currently the highest in the EU at 7.50%, as inflation is still too high.

Richter merger?

The Hungarian pharmaceutical company, Gedeon Richter, has announced plans to combine with Poland's Polpharma to create the largest pharmaceuticals firm in the central and eastern European region.

The Richter-Polpharma group would be the second largest generic producer for the Russian market, and the largest producer in central Europe.

It is estimated that the merger will have a combined market capitalization of Ft923bn ($5.3bn).

The combination is subject to approval by Richter's shareholders at the group's annual meeting on Dec 18.

Erik Bogsch, Richter's chief executive, said the acquisition targets outstanding growth potential in Poland, Russia and ex-Soviet countries.

The press quoted him as saying, "Consumption per capita is low in Poland, and that's where we feel the biggest potential growth in the region will come from.

"Consumption per capita stands at $240 a year in Hungary and Czech Republic, and at about $140 in Poland."

On the Budapest Stock Exchange (BSE) on Wednesday (Nov 15) closing, before the news came out in the public, the closing price for the Hungarian pharma was Ft36,360 ($209), with a volume of 30,000 shares traded.

A day later when, the news broke, the volume increased 10-fold, and the closing price of last Thursday was almost 7% higher.

Most of the local brokerage houses have raised their target prices for Richter's shares, as they realized the potential of such a merger.

Richter announced the intended merger the same day as its third quarter (3Q) earnings report, which pretty much came in line with market expectations; although there were some disappointing domestic figures, there were also more uplifting ones in terms of exports (especially from Russia.)

The lack of positive numbers from local sales is not surprising, given the government's current health care reforms, which have forced the pharmaceutical company to decrease prices and forced the drug producers to subsidize some of the costs for health care in Hungary.

The analysts of Cashline Securities expect the export sales to continuously improve, and the domestic market to stay flattish.

This is one of the reasons why we have a buying recommendation on the shares.

In addition, the new merger will provide a good reason to buy Richter even while there is a such low economic growth in the country, and uncertain financial turmoil in the US and European markets.

The 3Q earnings of OTP Bank, Hungary's largest lender, were also published late last week.

The results were better than the market consensus, due mostly to a net profit of Ft55.68bn ($320.5m), up 4% yoy, above the expected Ft54.1bn ($311.4m), as reported by Portfolio.hu.

Improving figures from the underlying business, and rising profit at the Russian unit (which struggled in the previous quarter), was expected to make OTP rally at least in the short-term.

However, because of the negative banking sentiment currently prevailing in the US and Europe, OTP has followed the negative international trend, and its price has been eroding for the past weeks.

Mol, the region's largest oil and gas producer, reported third quarter earnings more or less in line with the already low market expectations.

Upstream

The upstream (exploration and production) had some disappointing figures, with lower production in Hungary and a weaker dollar.

In fact, the upstream profit delivered a 43.9% fall yoy (to Ft19.6bn ($112.8m), much below the market consensus of Ft25bn ($143.9m).

The petrochemical division recorded outstanding performance. Unfortunately, the segment is not significant enough to counterbalance the negative impacts at other sections of the business.

The Cashline Securities analysts don't feel that MOL is cheap to buy. They have published a report with a recommendation to "hold" the shares after the EU Internal Market Commissioner, Charlie McCreevy, officially started legal action against Hungary over Lex MOL, or MOL law.

The new law protects Hungarian companies from any hostile takeover attempts from a state-owned foreign counterpart.

Lex-MOL was drafted after an attempt by Vienna-based oil company OMV for MOL, in a deal which could value MOL at $20bn.

Credit Rating Raised

Hungary's credit rating outlook was raised to stable from negative by Fitch Ratings after the government's efforts to cut the European Union's widest budget deficit.
Prime Minister Ferenc Gyurcsány has cut public jobs, raised taxes and slashed subsidies to trim the shortfall after the EU threatened to cut aid.
The measures will help Hungary reach its deficit targets for the first time since 2001, according to the Fitch report.
The upgrade was due to the narrowing budget deficit and the anticipation that budget deficit targets for 2007 and 2008 will also be met. However, 2009 is less certain due to the 2010 elections.
The government wants to cut the budget deficit to 6.4% of gross domestic product (GDP) this year and 4.1% next, from last year's unwanted record high of 9.2%. This year's shortfall may actually be 6.3%, which will help reach the 2008 target, according to the Fitch report.
The austerity measures slowed economic growth to 1.2% in the second quarter, the second slowest in the European Union after Denmark. Fitch predicts Hungary's GDP will rise 2% this year and 2.5% next year, lagging behind neighbors such as Slovakia and Romania.
Investors are now awaiting third quarter earnings for Hungarian companies. The analysts at Cashline Securities have published a buy recommendation on OTP Bank as they believe that the third quarter earnings report (published on Nov 14) might not bring any negative surprises, and, in the current bullish market, no bad news means good news. In addition, the Russian and Ukranian subsidiaries of OTP might bring better numbers.
Sluggish
After two sluggish quarters, the net interest margin might increase, which would be quite positive for the bank. On the back of that, according to local press sources, OTP is pursuing negotiations with AXA (a world leader in financial protection and wealth management) to sell some stake of OTP's domestic insurance unit (Garancia). Furthermore, market rumors say that AXA could purchase up to a 10% stake in OTP as well. These plans seem rational, since the performance of OTP's insurance unit became less attractive lately, and OTP needs additional capital to make acquisitions in Russia.
In the meantime, AXA has 2% market share only in Hungary. AXA's 10% stake in OTP would strengthen the partnership and help protect the bank against a hostile takeover, although such an attempt is not thought likely.
In the view of Cashline, the news will stir up the trading waters around OTP. Considering that the analysts are expecting a relatively strong flash report, they are looking for a positive reaction, unless there is a downturn in the global markets. As the share price of OTP has been depressed for the past few months, they see it as a good entry point to buy at the current levels (Ft9,300-9,400) before the third quarter earnings can bring an upswing.
Mol, the largest oil and gas company, will also report on Nov 14. Our analysts estimate lower numbers in this quarter, and don't see a shiny earnings report. Mol will not be favored by increased oil prices due to a high tax proportion in Russia and declining production in Hungary.
The weak US currency has not helped either, as MOL is a US dollar earner. The relatively mild weather thus far has also decreased the demand for fuel.
Even though the report will not bring any kind of positive surprises Mol's trading is determined mainly by the take-over speculation from Austrian rival OMV.
The first company to publish earnings will be Magyar Telekom today (Thursday, Nov 8), a subsidiary of the German giant Deutsche Telekom.
The analysts at Cashline Securities have issued a buy recommendation on the telecommunications company as it has growing sales, costs under control and a favorable shift in working capital, enough to keep cash generation outstanding.
It also has solid earnings, despite an unfavorably strong Hungarian forint, which is detrimental for the company's bottom line .

Interest rates held

The National Bank of Hungary (MNB) kept the benchmark interest rate unchanged at 7.5% on Monday (Oct 29). The MNB said that the recent rise in food prices carry some risk from the point of view of mid-term inflation goals (inflation expectations might elevate.) The central bank said in a statement that the mid-term inflation trend is still favorable (and the 3% inflation goal is achievable for 2009), partially due to Hungary's lower economic growth.

The decision to keep rates on hold reflected a cautious attitude of the central bank, and came as little surprise.Analysts believe that rates will fall faster if global markets are more ready to take risk, and this strengthens the forint.The rate will fall more slowly than projected if food or service prices rise more than expected, or if wage increases pick up.The analysts at Cashline Securities do not see dazzling prospects for the future of the Budapest Stock Exchange, as they expect Hungarian stocks to continue to underperform compared with regional peers, at least until the Hungarian companies publish their quarterly results (in first half of November.)

Part of the reason why this week has seen very low participation from investors in the Hungarian market is that they are taking no positions in the local market given the uncertainty caused by the BSE being closed today and tomorrow (Thursday and Friday, Nov 1-2)

MOL, meanwhile, has received the E2.1bn syndicated loan which the company applied for at the beginning of October, press sources reported.MOL, Hungary's largest company, and the leading oil and gas refiner in the region, said earlier that the loan was for financing operations and acquisitions.However, apart from raising its stake in Croatia's INA, there are no further public acquisition targets.Cashline's analysts think that the money could also be used for treasury share purchases, but as the Lex-MOL law has come into force already (which prevents hostile takeovers of strategic Hungarian companies), an attempted takeover from Austrian oil company OMV will be very unlikely.

The Slovakian government plans to build an oil pipeline between Slovnaft's Bratislava refinery (Slovnaft is an affiliate of MOL, with the Hungarian company owning 98%) and OMV's Schwechat refinery in order to decrease the dependency on Russia's "Friendship"(Druzba) pipeline, press sources have reported.The Slovakian government had wanted to start the building process in 2005, but at that time they found it too expensive (it would have cost around SKK30m, about $1.3m).

Gasoline hike
Economic news portal Portfolio.hu claimed that Mol had announced a Ft4 per liter hike on the gross retail price of gasoline effective as of tomorrow, while diesel prices will rise by Ft6 per liter.These price hikes come in line with the all-time high oil prices currently experienced, as an oil crude barrel cost has increased to $93, which is the record highest level yet seen.The hikes will boost the price of the most popular type of gasoline to an average Ft282.50 ($1.62) per liter, level with this year's highest price, set in August.Diesel will cost Ft176 ($1) per liter on average, higher than at any time since September 2006.

The Budapest Stock Exchange index, BUX, moved marginally up last week on average volume. The BUX closed on Monday 15 of October at 28,307 points. Meanwhile the Dow Jones Industrial average in the US closed last week at a historical high of 14,164. Mol, the largest Hungarian oil and gas company, traded for the past week above HUF 27,000 and slightly above HUF 28,000. OTP had uneventful trading between the levels of HUF 9,400 and HUF 9,500.

The Financial Times reported that Mol hired Goldman Sachs to advise on its defense against a bid from Austrian rival OMV.
Goldman will join giants UBS and Morgan Stanley in advising Mol, the newspaper said. The European Commission has threatened to take action against Hungary for approving the Lex Mol law, which gives the government power to veto a bid for Mol. JPMorgan Chase & Co. and Deutsche Bank AG are advising OMV, the newspaper said. The final outcome between the battle of Austrian OMV and Hungarian MOL is uncertain, and could last many more months, as well as whether the European Union will actively pursue a change in the new “Lex-Mol.” The outcome is very much unclear so I predict MOL shares will trade around the current levels.

For this week there was news for Richter, the largest pharmaceutical.
Richter announced on Monday Oct 15 that it acquired a 95.78% stake in Pharmafarm, the Romanian retail and wholesale group for EUR13m. The group operates 14 pharmacy units in 3 Romanian counties representing 2.5 percent market share at retail and 7 percent at wholesales business in Romania. Completion of the transaction remains subject to the approval of the Romanian Competition Authority.
Forest Lab and Richter said high doses of its experimental antipsychotic drug did not show statistically significant improvement in a mid-stage trial for the treatment of schizophrenia. However, low doses reached a significant effect. The companies are to continue developing the drug. This is negative news for the shares, however, it is hard to quantify the effect. I expect there will be some negative impact in the trading, especially if there will be a sell-off in the global markets.

Lex MOL bill passed

The Parliament approved "lex MOL" on Monday October 8. The law will come into force sometime next week. This law prevents foreign state-owned companies from taking over strategic Hungarian firms. The Lex MOL law is one of the strictest regulations in Europe, which could generously decrease the interest for Hungarian equities from international strategic investors. State-owned Austrian energy firm OMV's attempt to launch a hostile takeover of its Hungarian peer sparked the drive for the new legislation.
I believe that the Budapest Stock Exchange will under perform other regional markets as MOL, the largest oil and gas company will stay under selling pressure. This new law could also affect somewhat stocks like Richter (pharmateutical) and Magyar Telekom (subsidiary of Deutsche Telekom) as investors realize that those companies will not be subject to any hostile take-over attempt, reducing in that way its attractiveness as shareholders will not be compensated when selling their stake to a potential buyer. Analysts predict that in the case of the largest retail bank, OTP, it will not affect as much as already a hostile takeover for the bank was nearly impossible since its management has a strong control over the company already.
Furthermore, the Hungarian market has been underperforming in the past period, which could be related to preparing to "lex MOL.”
If the European Commission takes steps against the law, it could take years until any official decision is made by the European Court.
Last week, Internal Market Commissioner Charlie McCreevy wrote to Hungarian Economy Minister Janos Koka warning that he would push through a case against Hungary in the European Court of Justice if “Lex-MOL” was passed.
Koka, however, insisted the new law did not break European Union rules.
``It's not about protection against foreign investors,'' he told the Financial Times. ``It's about protection against illegal hostile demands.''
Vienna based OMV has for months pushed MOL to sit down at the negotiating table and last week offered 32,000 Hungarian forints per share, thus valuing the company at around 20 billion dollars. OMV asked MOL to unwind the shareholding structures that have given the management control of about 40 per cent of equity and to lift the 10 per cent voting limit on shareholdings. MOL’s management rejected the bid and conditions from OMV. Changing the rules would require 75 per cent of votes at an extraordinary general meeting, but the MOL board is now thought to have gained a voting influence of over 40 per cent by lending shares to banks with close links to the energy firm's management.
Several of MOL's independent shareholders (London based Centaurus Capital hedge fund and Templeton Asset Management) have come out in favor of talks with OMV, but so far MOL’s board has refused to change their ideas with respect to any possible synergy with its Austrian rival.

OMV bids for MOL

Vienna based oil company OMV AG finally made a hostile bid for MOL NyRt last Tuesday (Sep 25) offering Ft32,000 per share (a deal worth Ft2.8 trillion or $15.7bn) while the stock was trading around the Ft27,000 level. OMV asked MOL to unwind the shareholding structures that have given the management control of about 40% of equity, and to lift the 10% voting limit on shareholdings. MOL's management rejected the bid and conditions from OMV.
Centaurus Capital, a London-based hedge fund which holds 1% stake in MOL, strongly criticized the company's tactics in attempting to defend against the bid from its Austrian competitor.
Other significant prominent investors of Mol, the region's largest refiner, such as Templeton Asset Management, have also criticized it for its attitude towards the hostile bid.
Martin Bartenstein, Austria's economic minister, suggested that Hungary should consider taking a blocking minority stake of just over 25% in Mol.
"That way, the Hungarian government could ensure OMV was not taking over MOL, but rather that this was a deal between equals," he said.
However, Hungary's purchase of a minority stake to fight a hostile takeover would be the "wrong solution," economy minister János Kóka said.
Hungary is not interested in creating a regional oil and gas monopoly, and wants to keep Mol in private ownership, which makes it a more effective and faster-growing company than state-controlled OMV, Kóka claimed.
As stated by Bloomberg news, analysts predict that the Hungarian company and the government will impede any kind of a hostile takeover.
"This takeover is unlikely to go through without Mol management's approval," Goldman Sachs' analysts wrote this week.
"We view it as likely to open up a long period of negotiations between OMV, Mol and the Hungarian government, including legal battles."
OMV's management will speak with investors in several European cities this week to detail their takeover plans.
"The Hungarian Parliament will probably accept the so called "Lex-Mol" law that would prevent any kind of hostile bid or takeover of any national strategic company.
If this law is finally passed next week, the Budapest Stock Exchange might experience some selling pressure, as the attractiveness of its main stocks like OTP (the largest bank) and Richter Gedeon NyRt (pharmaceuticals) will decrease, since a foreign company will be less likely to take it over.
The chances of Mol shareholders abolishing the voting limit and canceling the company's own shares are slim, so there is a very low probability of OMV's public bid succeeding.
In my opinion, "Lex-MOL" does not make too much of a difference in the battle between MOL and OMV.
OMV expects the European Union to investigate whether the new law, allowing Hungary to veto the merger, complies with Union competition rules.
The EU is "monitoring the situation very closely," Oliver Drewes, a European Commission spokesman confirmed yesterday (Monday, Oct 1).

MOL and Richter

Mol , the Hungarian oil refiner, hired six banks to sell 2 billion euros ($2.8 billion) of loans to upgrade facilities and fund acquisitions.
Mol, based in Budapest, hired Citigroup Inc., Royal Bank of Scotland Group Plc, BNP Paribas, Bank of Tokyo-Mitsubishi UFJ Ltd., ING Group NV and Bank Austria Creditanstalt AG to sell the three-year loans.
Chairman Zsolt Hernadi denied earlier reports that the purpose of the loan is to finance a share buyback program, designed to prevent what the company calls an ``unwelcome''
advance from Vienna-based competitor OMV.
OMV doubled its stake in Mol to 19 percent in June and called for merger talks, which the Hungarian refiner has rejected. Mol said last month it will build gas-burning power
plants adjacent to the Hungarian company's refineries with Czech CEZ AS, central Europe's largest power company. This month the company signed a deal with Ina Industrija, Croatia's state-owned oil company, to expand their joint exploration of a gas field stretching across the border of Croatia and Hungary. (Bloomberg news)
At the beginning of the week, giant Golman Sachs investment bank raised the price of MOL 11% to HUF 30,000 as they claim that the oil company will benefit in 2008 from higher oil prices and wider refiner margins. MOL has been trading within the range of HUF 25,000 to HUF 26,000 for the past weeks.
Central European stocks declined at the beginning of this week, paced by banking shares including Vienna based banks Erste Bank AG and Hungarian OTP Bank after Citigroup cut its earnings forecasts for nine European banks citing a drop in credit-market revenue that will bring “wide-scale changes.”
Julius Baer one of the largest Swiss banking firms, recently increased their stake in Hungary’s largest bank OTP to more than 10 percent. The announcement was made after the Hungarian financial watchdog (PSZAF) approved the Swiss to take over more than 10 percent of OTP, but less than 15 percent stake in the Budapest based bank.

Richter, the second-largest listed drug maker in Central Europe and Hungarian company, may be forced by the country's damaged competitiveness and chaos in its line of business to scale down its domestic operations and seek increased production in Russia, Romania and India, Bogsch the CEO of the company said. He claimed that the conditions in these countries are much more attractive and the capacity could be utilized in a better way. However, this means only the additional or expanding capacities would be shifted which is a known intention of the company. Bogsch predicts a 20% decline in domestic sales for 2007 as no corrective measures to the health policy are seen. The analysts from Cashline Securities, Budapest, believe this is just another communication tool to put pressure on the Hungarian government. Currently, only 18% of the total sales come from the domestic market and its profit contribution will be even less by 2008. We believe that even if the worst case scenario fulfils, Richter will be able to save the amount that they will potentially loose in the domestic market for 2008 through cost cutting. Our analysts expect some minor negative effect in the trading, which could be counterbalanced by a possible HUF weakening against the EUR as Richter is an exporter company and has at least 55 percent of its total sales denominated in euros.

Poor Comparisons

Last week, Hungary published its Gross Domestic Product numbers for the second quarter of the year. The numbers were weak at 1.2 percent versus the first reading of 1.4 percent. The lower data is due to a 3.4 percent fall in consumption (mainly related to the government austerity measures). The Gross Domestic Product (GDP) figures are significantly worse that the Hungarian neighbors. In fact, Poland has a GDP growth close to 6.7 percent, Czeck Republic around 6 percent while Slovakia has a staggering 9.4 percent.

The numbers for the Hungarian inflation came out on Tuesday September 11. The market expected that it would fall to 8.2 percent yr/yr, but it came a little higher to 8.3 percent versus July’s inflation of 8.4 percent yr/yr. Inflation is much higher than in the other countries in the region as Poland and Czeck Republic inflation is around 2.6, while Slovakia has as low as 1.5.
Hungary, with higher inflation and lower growth that its neighbors, will face difficult times ahead. Foreign investors have a difficult time investing in Hungary as its fragile macroeconomic situation makes it less attractive than its neighbors.

The data itself is clearly negative, but I do not expect serious selling pressure on just this data. On the other hand, if the global market mood turns negative, the weak GDP-data might indicate significant profit taking in the stock market (mainly OTP, Magyar Telekom).

MOL, the largest oil and gas Hungarian company, continues loosing ground and has significant selling pressure in its shares as it is very improbable that OMV can make a hostile bid for MOL.
MTEL, the Telekom subsidiary of Deutsche Telekom, had some buying pressure as ING increased on Monday their target price to HUF 1,147 from 1,132 and also reiterated their buy recommendation. The analysts expect Magyar Telekom to announce soon a headcount reduction and to give a strategic outlook and financial guidance for the next years.Risks for Magyar Telekom (MTEL) include fixed-line deterioration and the macro economy in Hungary. This week, the market has remained quite volatile and with a death of domestic news, the Budapest stock exchange has followed the course of other foreign bourses, specially the Dow Jones from the USA. I expect the next weeks to remain shaky and characterized by nervous trading as investors are confused about the real impact of subprime mortgages in the US and the effect of that in international capital markets.

MOL, emerging currencies

Last week, MOL (Hungary’s largest oil and gas company) and CEZ (Czeck electricity Company) signed a letter of intent to create a strategic alliance and to set up a joint gas-fired power and heat generation business in countries where MOL has refinery operations using fired gas and refinery residuals. The announcement also said CEZ would purchase an equity stake in MOL up to 10 percent in the near future.

According to the local press, MOL's weight will decrease to 30.5% from 37.4% in the index of Morgan Stanley Capital International Inc. ("MSCI") which is a leading provider of equity (international and US), fixed income and hedge fund indices. MSCI has become the most widely used international equity benchmark by institutional investors. MOL's weight in the MSCI EMEA (Europe, the Middle East, and Africa) index is to lower to 1.22% from 1.66%, while Hungary's weight is to shrink to 4% from 4.4%. This is clearly negative to MOL, However, some of the large international investment funds already decreased MOL's weight in their portfolios so we have not seen massive selling pressure coming from large institutional funds.
The main reason for the decrease of the Hungarian oil company in the index is its free float, the number of shares that are freely available to the investing public, which has decreased substantially from more than 60% some months ago to around 40% nowadays. The decrease in free float is due mostly to two major players; MOL and Austrian oil company OMV. As we can recall from the past months, OMV, the Vienna-based oil and gas firm, announced that they had upped their stake in Hungarian MOL to 18.6 percent from 10 percent. The Austrian oil firm said they hold shares of MOL in order to entice closer alliances between the two companies amid energy sector consolidation. In addition, MOL initiated their buy-back program in order to avoid a hostile take-over from OMV. This consisted in buying their own shares in the market in order to reach a majority stake that would prevent any action from players like OMV.
Last Monday, Hungary's central bank kept its benchmark policy rate unchanged at 7.75%, choosing caution in the face of ongoing worries about trouble in global credit markets. Hungary's central bank revised its GDP growth forecast to 2% year on year in 2007 from 2.5% previously and hiked its inflation forecast to 4.5% year on year in 2007 from 3.6%. "The greater than expected slowdown in economic growth and the strong disinflationary effect of the fall in demand continue to represent downside risks," the central bank's monetary council said in a statement last Monday.
"The financial market turbulence stemming from the problems in the U.S. subprime mortgage market has contributed significantly to uncertainty in the global investment environment, leading to a rise in the required risk premium on forint assets," the statement said.

Many emerging-market assets, including currencies such as the Hungarian forint, tend to suffer in periods of global risk aversion, as investors slash exposure to risky assets to cover losses elsewhere. Hungary is particularly vulnerable to sudden shifts in global risk appetite, since foreigners hold 30% of local government debt as claimed by a MarketWatch article (from Dow Jones.)
"It is rather paradoxical that the Hungarian government failed for years to do something about the large imbalances in the economy, and that the markets more less ignored this because of the benign global financial climate, while the forint has recently come under pressure on the back of worsening global credit conditions and despite the Hungarian government tightening fiscal policy last year," wrote Lars Christensen, senior analyst at Denmark's Danske Bank, in a research note.
“As a result, monetary policy might now have to remain tighter because fiscal policy was not tightened when global financial conditions were more supportive” Christensen said.

In a soft landing, (when the economy is growing at a strong rate and the US Fed raises interest rates enough to slow the economy down without putting it into recession), investors say Eastern European currency assets should outperform. Emerging market currencies should outperform if the US enters into a moderate slowdown. However, portfolio strategies are on hold for now as the situation about recession or no recession is unclear, sitting on cash waiting to see the effects of the Federal Reserve's response to recent instability in credit markets.

Base rate held

Hungary's central bank (NBH) left the base rate unchanged at 7.75 percent which is the highest in the European Union. The decision made on Monday matched the expectations from the market. The Hungarian central bank's key rate compares with 2.75 percent in the Czech Republic and 4.50 percent in Poland. The decision came after Hungary’s National Bank decided to focus more on rising risk premiums resulting from a global credit crunch which could cause the forint (HUF) to weaken further, creating inflationary pressure. The Hungarian Forint lost approximately 4 percent against the Euro in the past month along with other East European currencies as international investors sold their risky emerging-market assets during the global credit crunch of the past weeks. However, the Forint has once again strengthened again in the past week in line with the Turkish lira, as the appetite for riskier assets has somewhat increased. The so-called carry trade investors buy lira-denominated assets because of Turkey's 17.5 percent interest rate, the highest in Europe. In addition they also purchase Hungarian bonds as the interest rates in Hungary are the highest in the European Union. The term currency carry trade is when investors borrow low-yielding currencies (like Japanese Yen) and lend high-yielding ones (like Turkish lira and Hungarian Forint.)
The National Bank of Hungary (NBH) said in a statement related to the rate decision that the improving balance of the domestic economy still gives room for a rate cut, however the increasing uncertainty in the international markets makes the Hungarian Central Bank more cautious. Economists believe that the Hungarian Central Bank is just postponing a rate cut until global markets settle and Hungarian inflation slows more markedly. The convergence story (newly introduced European Union countries have to converge their interest rates to the levels of the European Union) reflected by the treasury yields could further slow down in the short-term. A less aggressive than expected rate cut cycle is unfavorable to OTP, Hungarian biggest bank, and Magyar Telekom’s shares due to the slowing convergence story. The valuation of OTP becomes lower when treasury yields increase. Magyar Telekom is a dividend paying stock, and when yields are high, investors are more attracted to high Treasury yields than riskier stocks, even if they have high dividend payments. However, due to the negative correction in the past weeks, there will probably not be a notorious sell-off in these two stocks unless a global turmoil occurs again (in which case all equities in the Budapest Stock Exchange could further lower.)
Last week we saw positive economic data in the US which helped global markets, particularly interesting were the numbers for durable Goods orders and New Home sales. Durable goods orders are new orders placed with domestic manufacturers for the immediate and future delivery of factory hard goods. It tells investors what to expect from the manufacturing sector, a major component of the economy, and consequentially having an effect in their investments. The new home sales numbers were also better than the market projected. It represents the newly constructed homes with a committed sale during the month, as well as housing trends and economic momentum.
Despite the positive data from last week, we saw less shiny than expected housing statistics on Monday that could indicate that the real consequences of the housing problems in the US cannot be completely accounted for yet. On Monday we saw more trouble as the numbers for US existing home sales fell in July, adding to the inventory of unsold properties and showing the housing slump that triggered a collapse in credit markets could drag on in the future.
For the next weeks, I expect further volatility in the equity markets, but perhaps not as volatile as in the past weeks. We will continue to look into any data from the US, specially the one related to the housing market. In addition, we will pay extreme attention to the US’ GDP numbers published at the end of this week that could boost or reduce global confidence. And without confidence, I can assure you that the Budapest Stock Exchange will continue its downward path.

Don't panic - buy!

OTP Bank published second quarter earnings on Tuesday (Aug 14). Reporting a net profit of Ft50.68bn ($271.7m) for Q2 2007, slightly below the updated market expectation (according to Portfolio.hu) of Ft50.9bn
The biggest disappointment was the falling contribution of the Russian and Ukrainian units.
Although the profit of the Hungarian core activities (banking units) rose 5.7% from last year, the total Hungarian business (including insurance, leasing, etc) dropped 6.3% on a yearly basis, partially due to the higher financing costs of the foreign acquisitions.
Investors will probably act negatively on the second quarter report, especially if the global markets remain shaky.
Investors might question the reality of the 2010 plans regarding both OTP's foreign and domestic units. If management fails to set investors at ease, the shares come under serious selling pressure.
Over the past weeks, the ongoing US sub-prime mortgage stories have grabbed media attention and the global capital equity markets have responded with abrupt declines.
Many bearish investors predict that global markets will deteriorate further into recession. At these volatile times, investors ask themselves what they should make of the present situation, and how should they invest?
Firstly, it is worth mentioning that the size of the US economy is roughly $13.5 trillion and, on the worst case scenario, sub-prime mortgage losses could amount to $300-400bn.
No doubt, these losses would be a total blow for the affected households, but they are not big enough to cause a major recession, at least in nominal terms.
Eastern expansion
Another reason I do not expect a global deflationary collapse is that, despite the ongoing credit problems in the US, the emerging economies of Asia, eastern Europe (with the exception of Hungary), and Latin America continue to expand rapidly.
Perhaps the growth in these economies could act as a shield against any major fiscal set-back in the US.
So, given the current economic outlook, how should investors position themselves? I suggest they continue to avoid exposure to US financial assets as the risks far outweigh the prospective for return. But I would definitely continue investing in growing emerging economies.
Unfortunately, Hungary does not provide the growth of its regional peers, so buying most Hungarian stocks implies too many risks without really getting back fair returns.
Hungary has one of the worst economies of the EU, with tremendous twin deficits and no real reforms that would fix the financial problems, at least for the short-term.
In fact, Hungary's disappointing GDP (Gross Domestic Product) numbers were published on Tuesday (Aug 14) and indicate really hard times coming.
The economic growth is at its lowest in more than 10 years as fiscal measures to curb the budget deficit sapped consumer spending, and the Hungarian state reduced investment.
GDP rose by an annual 1.4%, following a rate of 2.7% in the previous three-month period. But Hungary's economic growth, the slowest among the EU's eastern members, may lose more speed. The government forecasts 2.2% growth this year, followed by 2.6% in 2008.
Despite all the bad news, there are two Hungarian companies that I could recommend to accumulate at these uncertain times, as they are treated as defensive stock: Budapest-based Richter Gedeon NyRt, the biggest eastern European pharmaceutical company and Magyar Telekom (MTEL).
After the big share price increases on the global markets over the past several months, there was an imminent need for a negative correction.
Such periodic pull-backs are normal within long-term bull-markets, and should be used as a buying opportunity.
Accordingly, I would urge investors to put their sub-prime worries behind them, and take advantage of the ongoing panic by buying fundamentally solid companies like Richter and MTEL in Hungary. In the business of investing, it usually pays to buy the panic!

Volatility in the markets
It has been a wild ride for global investors over the past weeks. Markets rocked with further volatility, spurred primarily by the US sub-prime credit situation as investors are convinced that the problems are spreading to other areas of the credit markets. Crude oil and other energy futures fell sharply in the beginning of this week, extending their steep losses from last week, as energy traders worried that a slowdown in the US economy will lower demand for oil.
We have been seeing a heavy sell-off in more risky assets, like Hungarian equities, and a shift into those perceived as "safe havens," such as bonds.
Similarly, jittery investors have also dumped some of their riskier bets on emerging currencies, as the Turkish lira led a decline in eastern Europe's currencies. The lira fall against the euro took it close to being its weakest in three months, leading the currencies of Poland and Hungary lower as well.
MOL NyRt, Hungary's oil and gas refiner, will publish its second quarter earnings today (Thursday, Aug 9). Cashline Securities analysts expect that the company will be hit by its weak upstream operations (drilling and exploration of oil and gas fields that bring raw materials to the surface); the weak US dollar (oil companies earn in dollars); flat crude oil prices; and a mild winter which has eased demand for natural gas production.
We still maintain our recommendation to hold the shares as the current trading is still more determined by speculation of a take-over bid by Austrian competitor OMV AG. If we were looking at the company on a pure fundamental basis, we would set Ft24,000 ($132) as a target price for the end of 2007, but the chance that OMV could make a public offer supports the current price, where MOL has been trading at up to Ft28,000 ($154) for the last few trading sessions.
Magyar Telekom (MTEL), the Hungarian mobile and fixed line company, will also report earnings today. We maintain our conservative accumulation recommendation, as the share price has declined considerably to more attractive buying levels. In the past month we saw the price fall from Ft1,006 ($5.53) to the range of Ft935-950 at which is currently trading.
Second quarter earnings are expected to bring no surprises, and if the shares decrease to close to Ft900 ($4.95), I would consider that as a good entry buying signal.
Profit contribution
Budapest-based Richter Gedeon NyRt, the biggest eastern European pharmaceutical company, has announced it acquired 70% of Strathman Biotech in Germany, of which 3% is going to be held by Helm, a Germany-based firm. The value of the deal is E22.9m (Ft5.7bn).
However, it will be official only after formal approval from the German authorities, which should arrive within a month. Based on the first unofficial information, the biotech company could generate a maximum of a few billion revenues in forint terms, while its profit contribution could reach to Ft300m ($1.6m) per year (0.5-1% of Richter's net profit).
Nevertheless, Richter will probably focus on research and development first, so the profit contribution will likely be relatively weak initially. We do not expect generous reaction in the price of the stock due to the deal's relatively small size.
I predict that global markets, in general, will remain quite volatile for the rest of the summer. Investors seem uncomfortable making any bets as there are simply too many uncertainties, and no clear signals, to the future course of the equity market.

Stocks tumbled worldwide last week as treasuries bonds rallied when investors sold off their stocks turning away from riskier assets into safe-haven ones like treasury bonds. Although the relationship between Treasury bond prices and the stock market is fairly indirect, the two tend to move in opposite directions. When investors panic or become bearish about their investments in the stock market, they tend to transfer their cash into the bond market, buying much safer instruments in exchange for their riskier stocks.
Many analysts have claimed that the reason of the sell-off was the recent concern about borrowing costs in the US which could slow takeovers and mergers, spur debt defaults, and curb earnings, prompting investors to flow riskier assets such as stocks. Many other also talk about the housing recession, exacerbated by climbing foreclosures among subprime borrowers. But haven’t we heard that story for more than 2 years? Perhaps analysts are just looking for reasons for a more than overdue negative correction. The question that I ask myself at this point is whether this is just a buy signal for cheaper bargain stocks or whether this is a more serious occurrence that can change the current bull market sentiment to a bear one. Stocks have risen to mighty heights prodigiously fast. The Dow Jones index has hit three milestones in nine months - crossing 12,000 in October, 13,000 in April, and just 2 weeks ago, 14,000. Sell-offs in equity markets are frequent, perfectly normal, and even healthy. When stocks increase in such a rapid manner their prices become unsustainably high. Only by falling occasionally (and even sharply) in the short run can stocks continue to rise in the long-term. Without the anguish of today's drop, the frenzy of tomorrow's good returns becomes unattainable.

The Hungarian Forint (HUF) extended looses all last week as emerging currencies continued to suffer from increased global risk aversion. The forint slide started on Wednesday of last week as emerging market assets were hit across the board when investors shun emerging markets such as Hungary on growing concerns, many claim, of a US mortgage fallout.
Other central European currencies suffered from the sell- off, such as the Polish zloty and the Slovak koruna.

Gedeon Richter Nyrt., Eastern Europe's biggest drug maker, published second-quarter results on Tuesday July 31. The results were better than expected. Sales revenue was HUF43.4bn vs the consensus 41.6bn. The higher sales were fueled by export sales (former Russian Republics, US, and EU markets) On the other hand, the domestic sales were hurt by the Hungarian government slashing subsidies and raising duties on drug makers. The analysts of Cashline Securities (Budapest) believe the results reflect signs of a rebound in the operations after the last 12-month market fallback in export markets and the negative effects of the changing local legislation. After the results, Richter received heavy buying pressure as investors are more optimistic of the Hungarian Pharmaceutical stock.

Hungarian oil and gas company MOL on Tuesday announced it had signed an agreement
to purchase 100pc of Italian peer Italiana Energia e Servizi (IES) for a price in line with MOL's target.
Bloomberg news claims that the final purchase price will be disclosed only after the closing of the transaction, expected to take place in Q4 2007, after approval by competition authorities.
MOL said it would transfer its know-how to improve the profitability of the refining and marketing operations.
This acquisition might somewhat disappoint the market from the point of view of pricing, but the might trigger a moderate upside in the share price.
On the other hand, many analysts do not expect a significant fall in the share price until the speculation regarding a buyout offer from Austrian competitor OMV remains and MOL continues purchasing its own treasury shares in order to avoid a hostile takeover.

MOL - OMV saga continues to dominate BSE talk
The Budapest Stock Exchange (BSE) index, the BUX, moved marginally down last week closing at 29,790 points on higher than average volume, as Hungarian oil and gas refiner MOl NyRt continues its buy-back program on its treasury shares. Mol, Hungary's largest company and owner of the nation's only refinery has already spent approximately Ft344bn ($1.9bn) buying back its shares to fight off a potential takeover from Austrian competitor OMV AG.
Mol closed a bit higher at the end of the week at Ft29,700 ($166). OTP Bank NyRt saw its highest closing price ever at Ft10,939 ($61) on Monday (July 23).
Dow Jones, the US financial publisher, also reported on Monday that MOL could be considering a merger with Poland's PKN Orlen, citing a report in Polish daily Gazeta Prawna, which quoted unnamed sources at MOL.
There have been some market rumors about a possible merger between MOL, with market value of almost $18bn and PKN Orlen, with market share of $9bn, in order to further avoid a possible takeover by OMV, although a spokesman for Budapest based-Mol rejected such reports.
According to Austrian national daily newspaper, Der Standard, Austria's economic minister, Martin Bartenstein, supports the idea of a merger between MOL and OMV.
He claimed that the EU would not block such a deal. Some market rumors claim OMV's CEO, Wolfgang Ruttenstorfer, is considering breaking off from his summer vacation due to the MOL-OMV issue.
The analysts of Cashline Securities believe that OMV has to take action very soon, if it is to strike, which could materialize in action at the EU court over the issue of MOL's buy back program. (MOL is allowed to hold only 10% of its shares. It currently has 2%, but has "loaned" almost 18% to OTP and the state-owned Hungarian Development Bank, or MFB Rt).
Cashline Securities maintain that MOL's share price will narrow to the Ft29,000-30,000 ($162-168) range in the short-term unless OMV makes a public offer.
Rate setting
On Monday (July 23), Hungary's central bank (MNB) kept its benchmark interest rate unchanged (and at the European Union's highest level), after inflation picked up on June.
The bank's policy makers, led by President András Simor, kept the rate at 7.75%.
Last month, the central bank cut its benchmark rate for the first time since 2005, as it expected inflation to slow down.
However, consumer price growth accelerated in June for the first time in three months, which could have been the reason for the delay in further rate reductions.
Unless there are clear signals of falling inflationary pressure, the MNB does not have enough room to ease key interest rates. The forint remains extraordinarily strong versus the dollar and euro.
The annual inflation rate rose to 8.6% in June from 8.5% the month before, the EU's second-highest rate.
The bank has a stated aim of cutting inflation to 3% within the next two years. But many central banks around the world have raised interest rates since the beginning of March, including those of US, the UK and the EU, making it harder for the MNB to cut rates.
Investors in Hungarian stocks should keep an eye on the second quarter earnings which will be published from next week until Aug 15. The first to report earnings will be Hungarian largest pharmaceutical company, Richter Gedeon NyRt, which is scheduled to announce its earnings on July 30 or 31.
In addition, global investors will continue paying attention to earnings in US companies. The results so far are quite mixed. To date, more than 129 companies in the US have reported quarterly results, with 60% of those beating Wall Street projections, according to Thomson First Call.
Investors will have plenty more earnings news to look forward to in the next weeks. If companies continue to support the positive sentiment in the US markets, the BSE will continue to touch record highs.

Positive sentiment in BSE

The Budapest Stock Exchange index, BUX, moved marginally up last week on high volume as there was continuous heavy trading at Hungarian oil company Mol. The BUX closed on Monday 16th of July at 30,005 points, which is a record high closing for the index.
Mol continues to climb back slowly, and closed on Monday at Ft29,700 ($166.64). OTP Bank NyRt had its highest closing price to date on Monday at Ft10,850 ($60.85), while Hungary's largest pharmaceutical company Richter Gedeon NyRt continued making marginal gains to close at Ft38,005 ($212.25) on Monday.
Last month, Austrian oil company OMV AG raised its stake in Budapest-based Mol to 18.6% from 10% and said it wanted talks on "cooperation."
Hungary's government labeled it as a hostile bid and is seeking to protect Mol's independence by saying it might draft legislation that would allow it to block a possible takeover by the oil company's Austrian rival.
The Economic Minister, János Kóka, also confirmed in an interview that the government would not back a merger, but would support MOL to become a "regional multinational" company.
The minister said any stronger cooperation would be possible only if the Austrian government sells its 31.5% stake in OMV.
Mol, Hungary's biggest company, has officially rejected any approach from its Austrian peer, calling it "unsolicited and unwelcome."
Zsolt Hernándi, CEO of Mol, said that he saw no chance for a merger, adding that stronger cooperation would be more likely with those companies that have different assets, such as Lukoil (Russia's largest oil company) or Rosneft, also of Russia.
Mol's management believes that a combination with OMV would not be beneficial for Mol, shareholders or any other parties involved (see No benefit from OMV merger, MOL says, Daily Updates, The Budapest Sun Online, July 11). An OMV spokesman denied that the Austrian company had made a formal offer to acquire Mol.
Strategic
Mol also said it will continue with its strategic future acquisitions of Russian oil fields, and a potential increase in its ownership share in Croatian refinery INA (of which it currently holds 25%.)
The MOL board decided on Monday, July 16, to increase the dividend payout ratio to 40%, starting 2008, depending on investment opportunities.
This would mean roughly a dividend of Ft800-1,000 ($4.48-5.61) per share from next year, under normal external assumptions. The dividend was Ft508 ($2.85) per share last year.
Furthermore, the company has announced it intends to continue its share buyback program. The board of directors intends to request authorization to cancel treasury shares at the next annual general meeting.
Mol has already spent almost Ft300bn ($1.68bn) on its share-buyback program, in the past few weeks. The company lent 10% of its stock to state-owned bank MFB Rt, and 8% to OTP, whose Chairman, Sándor Csányi, is a Mol vice president. The transactions will help Mol buy back more of its stock, as the legal limit it can hold is 10%.
Analysts from Cashline Securities claimed in regards to Mol's issue that "fundamentally and from an operational point of view, we do not see a further upside in the share price; however the raise in the dividend pay-out ratio target and a further share buy-back are likely to keep the share price close to Ft30,000 in the very short-term.
"We also doubt whether the company really intends to cancel its treasury shares at the next AGM, as it would dilute its control and lift OMV's influence again (unless MOL keeps buying until it reaches 60%.)"
In my opinion, the positive sentiment currently prevailing in the BSE and other global markets will continue, at least in the short-term. In fact, the Dow index was close to reaching a record high 14,000 points on Monday.
This week will see more companies reporting their second-quarter corporate earnings in the US. If companies meet or slightly exceed market expectations (which have been lowered ahead of time), the share price will receive buying interest.
If the US market keeps performing the way it has so far, we can be almost certain that the BSE will continue making new historic record highs.

Blue Chips take it in turn to support BSE bull run

The BUX, Hungary’s stock market index, moved moderately higher for the week, not even 1%, while the US Dow index is close to hitting a new historical high at levels of 13,650 points (closing level on Monday July 9th.)
The BUX is composed of more than a dozen stocks, but only five of them can be considered Blue Chips because of their greater market capitalization. Those so-called Blue chips are: OTP (largest local bank), MOL (oil and gas refiner), MTEL (Telecom), and Richter (the largest pharmaceutical producer in Hungary.)
OTP, MOL, and Magyar Telekom closed flat for the week. The winner for the week was Hungary’s pharmaceutical Richter as it gained almost 5% (closing on Monday 9th July at HUF 38,500.)

Richter might be getting some more attention from big investors as its outlook for the long term seems to become more and more positive, as claimed by Kornel Szarkadi - Szabo head of research in Cashline Securities. The analysts from Cashline have upgraded the stock and say that the pharmaceutical company can reach more than HUF 46,600 by the end of 2008. In their research they claim that Richter could significantly receive heavy buying pressure in the case they have a better than expected second quarter earnings report in August or if the HUF starts weakening against the EUR and/or the USD. A strong forint hurts profits in Richter as it shrinks its gross profit since exports become more expensive. In the case Richter is acquired by another party (and assuming a double-digit growth in 2008) the stock could exceed HUF 55,000-60,000 per share by 2009 or 2010. However, the analyst believes a takeover would not happen until at least 2009. For this matter, the research report should be considered more like a long term buy idea, rather than a short- term buy action with the purpose of “making a quick buck.”

MOL continues in the headlines as the story continues to unravel. Mol, Hungary’s biggest oil and gas company and Eastern Europe’s largest oil refiner by market value ($16.4 billion), continues its plans to buy back shares this year to reduce their number in the market and to avert a potential takeover from Austrian competitor OMV. This week, OMV's CEO Ruttenstorfer reiterated his former comments regarding the purchase of MOL’s stake. He also added that OMV believes that they would not buy MOL until the next few years, which adds a new tone, as OMV's former plans included only a strategic cooperation with MOL. MOL released an announcement where the company effectively rejected OMV's former partnership request adding that they would pursue its own strategy.

This week kicks off the second-quarter corporate earnings reporting period in the US when the first major company from the Dow are due to report. Like the first quarter earnings of this year, analysts and economists lowered the bar of expectations for company’s earnings, which means that companies will not have too much difficulty meeting or exceeding the market prospects. For this reason, I expect that the international sentiment will continue somewhat bullish and that the bull of Pamplona will keep running for the summer season. The Hungarian companies will start reporting their second quarter earnings in August, when we will be expectant about the outcome and whether or not they meet the market consensus. It could be a determining factor of the direction of the Hungarian Blue Chips, but the international sentiment will move the BSE (Budapest Stock Exchange) more than any surprises in their earning’s reports.

The Budapest Stock Exchange index, BUX, moved marginally last week with extremely high volume as continued heavy selling at Hungarian oil company MOL offset strong gains at OTP Bank. The BUX has closed on Monday the 2nd of July at 28,984. For the past week, the trading volume has accounted for at least double the daily average as we have seen USD 200 million or USD 300 million in daily turnover instead of the average USD 100 million.
After gaining almost 25% in three trading days (from Friday 22nd July until Tuesday 26 st July) MOL started to fall, losing approximately 8 percent since then as speculation of a bid by Austrian competitor OMV has been cooling off. We have been seeing heavy selling of the oil and gas refiner as there is speculation now that MOL will not be subject to a take-over from OMV at least for the short-term.
Hungary's government is drafting legislation that would allow it to block a possible takeover of oil and gas company Mol by its Austrian rival OMV. According to the Financial Times, Finance Minister Janos Veres said the Hungarian government is looking for ways to protect strategically industries such as MOL without violating European Union regulations. OMV already announced that they upped their stake to 18.6 percent from 10 percent. The Austrian oil firm said they bought additional shares of MOL in order to entice closer alliances between the two companies amid energy sector consolidation.
Elsewhere, OTP continued to outperform. Giant bank HSBC hiked its forecast on the Hungarian bank stock, giving the shares a new target price of 12,308 forints compared to 10,642 forints from its previous recommendation. HSBC said domestic political risk to the bank's growth targets had decreased. They also felt that the growth at its Russian subsidiary will be a key factor in delivering important future growth prospects. In addition, to these comments from HSBC’s analysts, Citigroup also mentioned OTP as one of their favorite picks within the CEEMEA areas.
Last week brought an unexpected rate decision from Hungary’s central bank: interest rates were cut by a quarter point to 7.75%. The decrease in interest rates was a surprise as the timing was a bit earlier but otherwise consistent with market expectations in terms of direction and measurement.
Hungary’s unexpected rate cut barely made the headlines given all the other excitement taking place with MOL’s story, which experienced record trading volumes as well as helped the Hungarian index (BUX) and OTP reach a record high last week.

The biggest story of BSE in 07.

Mol, Hungary’s biggest oil and gas company and Eastern Europe’s largest oil refiner by market value ($16.4 billion), plans to buy back shares this year to reduce their number in the market. The stock has increased by almost 25% since last Friday (June 22nd) if we take into consideration Tuesday’s (June 26th) price trading which has propelled MOL to an all-time high passing HUF 30,000 level. It all started last Friday, when MOL bought 1 percent of the total shares of the company in order to prevent a possible hostile takeover by another market player.
Megdet Rahimkulov, a former OAO Gazprom executive and Hungary’s richest billionaire, bought in the past month a significant stake of the company which as press releases such as Bloomberg claim was in turn sold this weekend to Vienna Capital Partners, who in turn sold the stake to Austrian oil company OMV. On Monday, OMV announced that they upped their stake to 18.6 percent from 10 percent which they already owned. The Austrian oil firm said they bought additional shares of MOL in order to entice closer alliances between the two companies amid energy sector consolidation. Reuters claimed on Sunday night that “the company is convinced by the long-term benefits of a closer cooperation.” The Austrian oil refiner thinks that a partnership between them could result in a good combination as they both have strengths in the regional central European market, preparing themselves to the unavoidable sector consolidation over the next 2-3 years. OMV said that they paid close to the market price for the 8.6 percent additional shares bought from Vienna Capital Partners. This would imply they paid a price close to 1 billion Euros for this stake. Partly because there has been some speculation in the market that MOL could become the target of a possible take-over, as well as investors speculate that MOL and OMV could further push up the price of the Hungarian stock if they get into a race to see who will buy a further stake in MOL.
Some analysts believe that MOL will continue buying some of its own shares in order to avert a potential takeover. MOL released an announcement where the company effectively rejected OMV's former partnership request adding that they would pursue its own strategy and confirmed that it would continue its buy-back program.
This is a clear signal that MOL intends to defend its independency.

Surprise interest rate cut by .25 % to 7.75 %
Hungary's central bank cut for the first time in more than half a year the base rate by .25 percent to 7.75 percent percent. When there are interests rate cuts, the most benefited equities are the dividend paying-utilities like Emasz (Hungarian electricity), dividend paying-Telecom stocks (Magyar Telekom), and banks (OTP.) Even at 7.75 percent the Hungarian rates are the highest in the European Union. The Hungarian central bank's key rate compares with 2.75 percent in the Czech Republic and 4.25 percent in Poland and Slovakia. The National Bank claimed that further rate cuts will only materialize if the inflationary risk further decreases. Data published in the past month show that inflation has peaked (8.5% for May) and is showing a slowing trend.
Another detail worth mentioning for this week is that the BUX or Hungarian index is at-its all-time-high surpassing the 29,000 level on Tuesday. OTP is also trading at a historical record high, already through the psychological level of 10,000 HUF. Even though other international and regional markets have cooled off, the Budapest Stock Exchange (BSE) continues strong, mostly due to the heavy buying of Hungarian oil and gas MOL (which encompasses 33% of the BUX or Budapest Stock index.)

Bullish sentiment drives record highs; French, Russian and Chinese players have impact on the market

The stock market rally continued last week as the BUX, the Hungarian index, reached, once again, record prices on Friday (June 1).

In general, the global markets are up lately, whether there is good news, bad news, or, simply, no news at all.

The most noteworthy events in Hungary over the the past few weeks were the corporate rumors about Egis, one of the largest local pharmaceutical companies, as well as other stories surrounding the largest oil and gas company, MOL.

French connection

The press and several market players have speculated that Servier (a private French pharmaceutical company) could initiate a take-over of Egis, or that it would boost its stake in the company, in which it currently holds a 51% share. Both variations would trigger a public bid for Egis's minority owners.

In light of the rumors, the stock went up by 12% in the past couple of weeks.

Russian-born Hungarian banker and investor Megdet Rahimkulov, confirmed in the press that he held 5.23% of MOL shares directly and indirectly, but no additional detailed information regarding the reason for his interest in the company was made public.

Rahimkulov claimed that he wants to boost his stake in Hungarian fuels group MOL to 10%, and intends to acquire an even larger stake in OTP (in which he officially owns a little more than 5%.)

Other players jumped on the wagon and bought MOL once they speculated that there must be a good reason for the Russian billionaire to raise his MOL stake.

Chinese bubble

In terms of the rest of the global markets, the US continues reporting new record highs in spite of concerns about global implications of a potential bubble-burst in China.

China's main stock index tumbled 8.3% on Monday (June 4) in its second biggest drop this decade, extending big losses suffered last week after the government hiked the share trading tax to cool its bull run market.

Even though investors in Asia are selling their shares, many others are keeping their eyes closed, as other international markets have not been affected by the fear on the Asian bourses.

Investors perhaps remember that the Feb 27 downward move in the stock market, after a similar drop in Shanghai, simply produced an excellent buying opportunity with no lasting negatives.

As that is the general sentiment prevailing, I estimate that, when prices go significantly lower, traders will use this to buy stocks at a cheaper price, and the market will quickly rebound to new-time highs.

Of course, there are other, more bearish, analysts who believe that a market downward turn is just a signal to short stocks, and they predict that the market will keep falling on heavy selling pressure, which would mean that there is a sentiment-change from a bull market to a bear market.

Dividends agreed

MOL and Magyar Telekom held their AGMs on Thursday. The following proposals were approved: Dividend of Ft508 ($2.80) and Ft70 (40˘) per share, respectively, abolition of the golden shares and stricter bylaw articles that protect against hostile a take-over.
On Friday (Apr 27), the US announced the figures of the first quarter GDP, which increased at a 1.3% annual rate, the slowest pace in four years.
The main reason for this slower growth was the weak housing market. Wall Street economists were disappointed, as the expectations were that GDP would grow at 1.8% in the quarter, versus a 2.5% pace of growth in the fourth quarter.
In addition to this, the first-quarter GDP price index, an important inflation component, rose at an annual 4%, the most in 16 years, busting the forecast for a rise to 3.2% from 1.7% last quarter.
The overall message of the report seemed to be slower growth paired with higher inflation - and that is not very friendly to stock investors.
However, after the figures showed the week economic growth, the reaction was pretty muted, with the exception of the dollar which slumped further to its lowest level yet against the euro, and also fell against the Japanese yen.
The most optimistic investors have kept buying equities, as they feel that the numbers will have little effect on yields on US Treasury securities, because the larger-than-forecast gain in prices could offset weaker-than-forecast growth, suggesting the Federal Reserve will not move interest rates up or down in coming months.
The US dollar is at its all time low against foreign currencies. For example, the forint has been trading at Ft179-180 against the American currency. The forint also remains strong against the euro, as it has been trading in the Ft245 range .
European stocks hit new six-and-half-year highs last Thursday (Apr 26), boosted by record levels in the US stock market and a large number of updates from some of Europe's top companies, including Bayer and France Telecom (Europe's second-largest telecommunications company.)
The German DAX Xetra 30 index is near its record historical high as well as French CAC 40. The BUX, or Hungarian index, remains strong, even though it has seen higher closing prices in the past weeks.
The BSE had a short trading week, as the market was closed both Monday (Apr 30) and Tuesday (May 1).

Positive signals and pleasant surprises

In past weeks we have experienced somewhat positive signals from the macroeconomic data released in the US.
There has been some pleasant surprises that have helped support the optimistic sentiment currently prevailing in the stock markets, such as the better-than-expected readings from the US trade deficit, suggesting that the recent improvement in the trade gap has had a positive effect on growth in the gross domestic product.
In addition, Americans' spending kept growing at a healthy pace in March and February, and the latest government data on retail sales showed consumers are still confident about the economy.
In the weeks to come, investors will be looking for guidance in the coming corporate earnings of the US. Already last week some of the Blue Chips, or large capitalization stocks, announced their first quarter earnings results for 2007.

Upbeat earnings
Luckily the earnings were upbeat and the majority of investors felt comfortable buying into the equity markets. The overall earnings reporting period is expected to be pretty weak.
The earnings growth from big US companies for the first quarter is currently forecasted to be lower than other quarters in the past.
Many analysts predict that markets will be benefited regardless, since companies will not have a difficult time impressing investors as the expectations of earnings are so low anyway.
The most bullish investors believe that there is plenty of cash in the sidelines that will be invested in the markets during the next week of earnings season, unless there is really much lower corporate earnings than forecasted.
Other less optimistic economists believe the market will be highly volatile during the earning season and will move sideways, guiding itself solely on results from individual earnings reports.
The BUX, index of the Budapest Stock Exchange (BSE), hit its 12-month this week as it reached beyond 25,100 points on Monday.
The BSE continues to be positively favored by the optimism currently prevailing in the global equity markets, as the US recuperates from its equity looses of February and March, and investors continue pouring cash into emerging markets such as BSE. The big winners for last week in the BSE were MOL, the oil and gas refinery, and OTP, the largest Hungarian bank.
Oil stock MOL gained more than 5% last week. Monday it went through the psychological level of Ft23,000, which is an important resistance level.
OTP Bank gained close to 4%. The Hungarian bank stock reached the psychological level of Ft9,000.
When the stocks reach psychological levels or resistance levels many prearranged stop sell orders are triggered. Investors use a "sell stop" hoping to gain momentum if the price reaches a particular price.
If it exceeds the level indicated (Ft9,000 for OTP or Ft23,000 for MOL), it will automatically trigger a market order and will be executed at the best price immediately obtainable. When so many "stop sell orders" are triggered it pushes the price of the stock lower on heavier temporary selling pressure. That is the reason that stocks have a difficult time overcoming the resistance or psychological levels. I expect optimism to continue to prevail in the global equity markets as investors already expect lower corporate earnings.
In the coming weeks, everyone will be looking for guidance in the coming corporate earnings announcements and other macroeconomic data that could move the markets upward.
In terms of Hungarian stocks, I think MOL and OTP will continue recording gains. Watch for prices of oil as they will determine the movement of MOL's stock. On the other hand, OTP might be further favored by the amicable sentiment on global stock exchanges.

Iran, Amex and possible BSE benefits

Crude oil rose above $66 a barrel last week, closing at its six-month high, on concerns about Iran's geopolitical tensions, which increases the likelihood of a disruption of shipments from the Persian Gulf.
Iran ranks as the world's fourth-largest oil producer behind Russia, Saudi Arabia, and the United States.
Iran also has the world's second-largest reserves of natural gas, behind Russia.
However, the United States gets less than 20 % of its oil from the Mideast, and has an embargo on all Iranian oil.
So why do events in the Middle East have such an impact on US oil prices? With worldwide demand for oil running high, and supplies barely able to keep up, an interruption of Iranian exports has investors nervous.
Experts claim that Iran needs to export oil just as badly as the world needs to buy it, making a complete shutdown unlikely.
Nevertheless, traders fear the country could use oil as a weapon, withholding it in retaliation for sanctions or a military strike on its nuclear program.
In addition, the summer driving season is coming and the market is speculating on whether we will have adequate gasoline supply.
However, many believe that the gasoline supply is sufficient and the real reason behind the higher prices is that there is lots of cash or liquidity in the financial systems, and investors simply just want to buy securities that could over-perform, which have lately been the gas and crude stocks.
Many traders think that the price of oil goes even higher once the commodity-contract passes the psychological level of $65.
Once the price goes above $65 many prearranged stop buy orders were triggered.
Investors use a buy stop hoping to gain momentum if the price reaches a particular level.
Stop buy orders
If the price exceeds the level indicated ($65 for example), it will automatically trigger a market order and will be executed at the best price immediately obtainable.
When so many "stop buy orders" are triggered, it pushes the oil price even higher on heavier temporary buying pressure.
Generalizing, we could say that non-commodity companies traded on the market have an indirect relation to oil prices.
When oil prices increase, corporate profits suffer (if we assume all other factors remain unchanged), because companies must pay more for their energy use.
In addition, higher oil prices dampen consumer confidence, which could consequently lead to decreased sales and lower company profits. But, although higher prices are bad for corporations, emerging markets like the Budapest bourse could, theoretically, benefit from higher oil prices.
Hedge funds had a large influence, because they continued buying energy shares in order to satisfy their need for higher risk emerging assets.
If Hungary's regional neighbors like Russia perform well, it is expected that the Budapest Stock Exchange (BSE) will also benefit.
The price of MOL, the largest Hungarian oil and gas refiner, rallied last week on higher price gains from oil and gas companies in the US and Russia.
Its most significant trading session was last Friday (Mar 30), when it closed 3.5% higher on the day, and it continued recording gains for this week on still high oil prices.

The power of the Fed

Hungary's central bank (NBH) has, for the fifth consecutive policy meeting, left the base rate unchanged at 8.00% in line with market expectations. The central bank is currently ignoring the fact that the forint is so strong against the Euro and focusing much more in the inflationary pressures. Capital market trends continued to strongly influence the Budapest exchange. The Budapest Stock Exchange was lifted on the international optimism fueled mostly by the rather-positive announcements from the US Federal Reserve (Fed) and the maintenance of interest rates in the US. The Fed kept its target for the federal funds rate, an overnight bank lending rate that helps determine rates on credit card, home equity and other loans, at 5.25 percent. One of the biggest bones the Fed threw to the markets in its last statement was its omission to directly mention the problems developing in the sub-prime mortgage market, taking that as a sign that rising defaults among borrowers with poor credit histories may not be that big of an issue. Sub-prime borrowers, those with poor or limited credit records or high debt burdens, made up about a fifth of all new mortgages last year. Many investors interpreted that rates in the near term would not be raised and that the Fed might even start cutting them if need be later this year.
Although the relationship between interest rates and the stock market is fairly indirect, the two tend to move in opposite directions. A decrease in interest rates means that those who are buying securities such as bonds have a decreased opportunity to make income from interest. Assuming investors behave rationally; a decrease in interest rates prompts investors to move money away from the bond market to the equity market, helping the prices of stocks to rise as there is a transfer of capital from selling their bonds and buying stocks. At the same time, businesses enjoy the ability to finance expansion at a cheaper rate, thereby increasing their future earnings potential, which leads to higher stock prices. Investors and economists alike therefore view lower interest rates as catalysts for expansion since they lower business costs, boost corporate profits, and consequently stock prices.
Oil prices rises Crude oil prices were up for the whole last week on fears that supplies would be disrupted as international tensions increased over Iran's nuclear program and its detention of British sailors and marines since last Friday.
This latest escalation of tensions in the oil-rich Gulf sent the Amex Oil Index (XOI) up a 7% advance for the week. The XOI is an index of the leading companies involved in the exploration, production, and development of petroleum. It measures the performance of the oil industry through changes in the prices of the stocks that they comprise.
MOL, Hungary’s biggest oil and gas refinery, has been lifted since last week in part by the global geopolitical tensions in Iran and the influence of a higher price of the XOI index.

Oil and Gold in the way up

February 28, 2007 08:00 am On the Hungarian macro-economic front, the Hungarian National Bank (MNB) left its benchmark interest rate at 8%, in line with market expectations.

This is the fourth consecutive time that rates have been left unchanged. The MNB raised its forecast for 2007's annual average inflation to 7.4% from 6.9%.
As reported elsewhere, the PM nominated András Simor as the head of the National Bank. He will replace Zsigmond Járai on Mar 2.
We believe this new nomination to be good news for the market, given the business experience of Simor as the chairman of Deloitte and Touche Hungary, and as the chairman of the Budapest Stock Exchange (BSE) from 1998-2002.
Last week's performance of the major stocks in the BSE was mixed.
The price for OTP, the largest retail local bank, decreased by almost 4%. MOL, the largest oil and gas refinery in Hungary, on the other hand, increased by more than 3% for the past week.
There were two main reasons for the hike in MOL's price; higher oil and commodity prices in the US and the upgrade from Goldman Sachs from "hold" to a "buy" recommendation.
Safe haven?
The most significant events in the US markets lately were the heightened geopolitical tensions in Iran, the world's fourth-largest oil producer, which lifted the price of oil and commodities including gold.
Iran's President, Mahmoud Ahmadinejad, said last week that he would continue to pursue his nuclear program, ignoring a UN deadline to halt an uranium enrichment program, amid fears it could be used to make atom bombs.
In light of the geopolitical tensions, gold touched a new nine-month high of $685/oz on Friday, now very close to the key psychological mark of $700.
The price of gold often rises with increased geopolitical concerns because of the metal's appeal as a financial safe-haven.
Silver also jumped to a nine-month high on Friday, while oil climbed above $61 to its highest level this year.
Investors will be keeping an eye on crude oil prices, especially after the United States reported an unexpected drop in gasoline inventory capabilities.
This made investors anxious as they predict a higher demand for petroleum ahead of the summer driving season.
Oil production, which reached about six million barrels a day in the late 1970s, now lingers at around 3.5 million, according to the US Energy Information Administration (EIA).
In more concrete terms, within the stock market, the run-up in prices of commodities gave a lift to metals and mining stocks, as well as to energy stocks, but also put a damper on any broader market advance of the major US stock indices.
Six-year highs
Even thought the Dow Jones index has been very bullish lately, and the S&P 500 and NASDAQ composite have been reaching more than six-year highs, all indices retreated late last week on Iran's nuclear pursues and higher commodity and oil prices.
With oil and gold prices continuing to move higher on geopolitical concerns, investors are becoming a little worried about the direction of the stock markets and are investing more heavily in energy-related stocks and commodities like oil, gold, and silver.
Ana Herrero-Wallace works in equity sales at Cashline Securities (Budapest). She has also worked as a NASDAQ trader for another brokerage and securities firm in the US.

Seven days of disappointments but prices remain strong in the markets

OTP, the largest bank, reported lower than expected figures in its financial statements for the fourth quarter of 2006.
The most significant problem for the local bank is the weakening net interest margin due to increasing competition (Raiffeisen, Erste Bank etc).
Another issue is costly funding due to its expansionist strategy, which consists of acquiring smaller banks from other countries in the region.
OTP hurt
This year, OTP will also be hurt by the austerity measures implemented by the government.
MOL, the oil and gas refining company, was mostly hurt by the strong forint, which eroded profits, as well as the weakening of the US dollar.
In addition, the drop in gasoline and diesel crack spreads (the margin a refinery can earn by cracking a barrel of oil into refined products) in the fourth quarter also had negative effects.
Magyar Telekom, the largest teleco in terms of market share in Hungary, suffered as its net profit missed market expectations.
Richter and Egis, the largest pharmaceutical companies, reported unsatisfactory numbers too; net profit was deeply hurt because of lower domestic earnings due to the new healthcare regulations.
The strong forint has also dented export sales. There are numerous uncertainties for drug producers for 2007, which could prove to be a more difficult year than 2006, after the implementation of healthcare system reforms in both Hungary and Russia.
It is hard to predict the future development of the Hungarian stock prices because they are primarily driven by the performance of the US markets.
The effects of the bullish sentiment or optimism in Wall Street is reflected in the rest of the global markets, since international investors feel upbeat and the appetite for emerging market assets increases, even if the fundamentals of the companies do not look so cheerful.
Significant
Last Wednesday and Thursday were very significant days for the market. Ben S Bernanke, Chairman of the Federal Reserve (Fed), gave an upbeat picture of the economy and suggested he is in no hurry to either raise or lower interest rates, as inflation is likely to slow on lower energy and commodity prices.
Even the most skeptical found relief in the idea that the Fed would not raise interest rates in the short-term, therefore causing a rally in stocks as last week we saw another historical high for the Dow Jones.
Investors like lower rates since they lower business costs, boost corporate profits and consequently stock prices.
Hungarian stocks received Bernanke's words with open arms and the Budapest Stock Exchange index was fueled with buying pressure on optimism for emerging assets.

Optimism in emerging

The decision triggered a rally in US stocks and bonds, which helped other international markets as investors concluded the central bank will keep rates unchanged for the short-term.
The perception is that economic growth is accelerating without generating faster inflation.
Another very positive event was the release of GDP figures, which increased at a faster-than-forecasted annual pace of 3.5% for the last quarter of 2006.
The economists expected only 3% gains, so everyone was surprised. The environment was propelled by declining gasoline prices that helped increase consumer spending and contain inflation.
The decision on interest rates allowed emerging markets, such as Hungary, to enjoy an unchanged yield advantage over developed markets.
The Budapest Stock Index (BUX) rose by 387 points or 1.63% for the week. In order to understand the main factor driving emerging markets such as Hungary, we must first understand the relationship between it and interest rates in the US.
Investors are hungry for risky, emerging markets stocks when the economic outlook in the US is looking "shiny", which implies the Fed would leave or decrease interest rates.
When interest rates increase in the US, international investors sell off their more risky stocks and bonds in emerging markets (causing the BUX to lower) and buy into safer assets and higher yielding US bonds.
In terms of the local financial environment, for the next few weeks investors will be paying attention to the fourth quarter earnings published by Hungarian publicly traded firms.
If they bring any surprises, which translate to unexpected earnings figures, the stock will come under buying (price goes up) or selling (price falls) pressure.
We should also focus our attention on perceived political instability, which might been seen if there are more political riots, such as those last week outside Parliament, and could negatively affect the Hungarian bourse.
Investors might show a little more caution, and volume could be low, if worried buyers and sellers leave the market or become inactive, waiting for any outcome from violent riots and other political acts.
It appears as if the United States was in a scenario of slightly better global growth, more contained inflation, and better financial stability.
However, downside risks in underlying financial conditions remain. Growth could slow more sharply in the US if the housing market were to weaken rapidly.
In addition, inflation could spike, possibly reflecting rising energy prices, especially oil.
We must stay vigilant to any disorderly unwinding of global imbalances which could become a threat, a slower economy in the US and possible political instabilities in Hungary, as well as disappointing last quarter earnings for the Hungarian companies that trade in the stock exchange.

Stories that feed markets: OTP, Apple and the US CPI

THE BSE, or Budapest Stock Exchange, had a mixed performance for the week. It started the first part reporting significant losses in line with other international emerging markets like Brazil, South Korea, and other Central and Eastern European bourses. The negative trend turned positive in the second half of the week, when big buyers showed interest in the Hungarian Exchange, specially buying shares of OTP, the largest retail bank in Hungary. OTP accounted for almost half of the total volume of trading for the past days. However, the change in prices for OTP and MOL were not that dramatic. OTP ended the week almost flat, while MOL lost a little more than 1%.
HOLDING THEIR BREATH Investors held their breath after Russia and Belarus broke into an oil war and Russia announced, on the night of January 7, the shutdown of the pipeline that delivers oil to countries like Hungary, Germany, Poland and others. Luckily, the halt lasted only for three days, when Russia then came to terms with Belarus and restarted the flow of petroleum to Europe. The Hungarian oil and gas integrated company, MOL, fell slightly in the beginning of the week. However, MOL was more affected by lower oil prices than by the three-day pipeline oil halt. MOL has its own strategic reserves of crude oil.
NO PANIC In addition to that, the Hungarian government has its own reserves that can supply oil for almost 90 days, so investors did not panic. In general, the international outlook for the financial markets seemed bullish or optimistic; The Dow average finished on Friday at another historical record. US stocks rose the most in more than three months on expectation of profits from technology companies such as Apple Inc. and Microsoft Corp. increasing, as new products prompt consumers and businesses to spend more. The Nasdaq Composite Index, which gets more than two-fifths of its market value from computer-related companies has grown considerably and is now at the high levels not seen since February 2001. The stronger-than-forecasted December retail sales in America suggested that the Federal Reserve may not lower yet interest rates for the first half of the year. However, if interest rates do rise, investors are very likely to sell their stocks and buy into US bonds instead, hurting the stock markets worldwide. Investors have high expectations for today, Thursday, January 18, when the US will publish the year-on-year CPI (consumer price index) figures for core inflation. The expectations are 2.6%. If the CPI figure remains unchanged or if it is lower than the expected 2.6%, it is more than likely that the stock markets and the BSE will benefit as a result.
NEGATIVE SENTIMENT If that number is higher than 2.6%, however, in Hungary we could suffer selling pressure in the stock markets and the BSE could fall on negative sentiment. The negative data in the macroeconomic front increases the chances of a rate increase by the US Federal Reserve, which would make it harder for emerging markets, such as Hungary, to attract further foreign investors.

Will buoyant mood continue?

Investors remained optimistic for 2006, especially in the last quarter, when the Budapest Stock index (BUX) increased 15%, to finish the year at 17%. Especially interesting were the performances of two Hungarian firms, MOL, integrated oil and gas firm, and OTP, the largest banking player. Both increased +12% and +27% respectively for the last quarter of 2006. There are doubts about the direction of the Budapest Stock Exchange (BSE) for this year. It started the new year on the wrong foot: its index, the BUX, was the third worst performing worldwide since the beginning of 2007. The negative sentiment was largely felt in companies like MOL and OTP, which fell -7% and -4%.
MOL TENDER MOL won a tender to buy 100 % of BaiTex, an oil producer in one of Russia’s regions near Kazakhstan. Not even good news for MOL could save it from investors’ sell-off. Lower oil prices were the key driver of the fall of MOL. Synchronous with some of the rest of its regional peers like OMV (Vienna-based) and PKN (Poland’s biggest), MOL recorded losses for the past week. This shortfall in prices for oil-based stocks is not surprising in an environment where oil prices have been decreasing since the beginning of the year. This recent decline is the result of several factors, including a relatively stable geopolitical environment and slowing economic growth in the US. Also, the warm winter temperature and a decrease in the demand for heating oil, especially from the northeast of the US. If we want to predict the future performance of MOL, we need to ask ourselves where we think oil prices and refining margins will go in the future.
OIL INFLUENCE Oil prices have also influenced the largest local bank in Hungary, OTP. If the price of crude oil rises, the outlook for Russia grows optimistic since it is a commodity-oil based economy. Two Austrian banks, Raiffeisen and Erste were specially benefited by the bullish sentiment in Russia as they have numerous subsidiaries in the region. OTP was favored by the optimism of its Austrian banking peers. In addition, we must recall the strengthening of the forint, with respect to the euro and dollar, which helped OTP. Even so, the trend has reversed for the past week.
DRIVEN BY MOOD We can claim that the BSE, like many other emerging markets, is a sentiment-driven market, highly influenced by the international mood. It is mostly traded by foreign investors; at least more than 75%. Emerging markets were bullish in 2006. The last issue of The Economist claimed three main factors that have fuelled the investors’ appetite for buying into emerging markets, such as the BUX. Cash was the main driver; international investors had plenty of it, as well as plenty of credit distributed to those wanting to borrow. Another factor was the increasing corporate profits for companies in the US market. Companies have used it to buy shares back, sweeping the stock markets with them. Lastly, oil went up pushing emerging commodity-and-oil driven stocks with it, especially in Russia. Hedge funds had a large influence because they continued buying energy shares in order to satisfy their need for higher risk emerging assets. If Hungary’s regional neighbors like Russia perform well, it is expected that the BSE will benefit.
HISTORICAL HIGH The US market finished the year hitting historic highs. Is it my belief, that if we want to predict the performance for the BUX in 2007, we must first study America’s economy and its markets, as well as oil prices, and the possible weakening of the forint. Investors are worried about the present controversial situation of the US and the Fed, its central bank. Will they increase interest rates in order to contain inflation, but threaten to slow down the economy? Unfortunately, there are big uncertainties for the US economy; who has not heard of the housing bubble? Americans have a negative personal savings rate, and a high core inflation (2.7%), above the Fed’s comfort zone of 2%. Let us hope that the US economy and its markets will continue optimistic for 2007. Similar to the old saying, if Wall Street shivers, the Budapest Stock Exchange might tremble.