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!