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.