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.
Wednesday, 29 August 2007
Wednesday, 15 August 2007
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!
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!
Wednesday, 8 August 2007
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.
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.
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