BUX sky-rockets on policy expectations

Investors besieged shares in expectation of consumer- and business-friendly government measures in the wake of a by-election on Sunday that saw the far-right Jobbik party snatch a seat in parliament from the ruling Fidesz party. It was the second loss of a parliamentary mandate by Fidesz – the first was to a candidate backed by a coalition of center-left and liberal opposition parties – in as many months.

"Watch Hungaryʼs 2016 budget draft for populist measures," Bank of America Merrill Lynch said in a note on Monday. The governing Fidesz partyʼs declining approval ratings raise risks of populist policy choices, it said.

As if on tact, a deputy state secretary at the Economy Ministry told local business daily Napi Gazdasag on Monday that Hungary’s corporate income tax rate could be lowered to a flat 10% already in 2016 if it does not put budget deficit plans at risk. The current main rate is 19%, with a preferential rate of 10% for small firms.

The official aired the intention to cut tax just after the Prime Minister, in his regular week-end radio interview on Friday, still excluded such a step for next year.

Confirming earlier high level suggestions, the Economy Ministry official also said Hungary’s economic results make it possible to consider lowering the VAT. The VAT cut could, under no circumstances, bring about a hike to income taxes. Quite the contrary, the cabinet wants to considerably reduce the latter, he said.

Expectations for friendly measures increase at a time when headline economic data improves in Hungary, when many investors expect an upgrade in Hungaryʼs "junk" credit ratings by rating agencies in the next year or so, when the market takes for granted that the National Bank of Hungaryʼs (MNB) 1.95% base rate will be cut further – helping equities as investors require a lower rate of return, particularly on stocks which pay dividends – and when Central European assets are being underpinned by the European Central Bankʼs (ECB) asset purchase programme which make high-rated yields disappear.

In a note on Monday, Morgan Stanley raised its Hungary GDP growth call to 3.5% from 2.9% for this year, putting it ahead of the MNBʼs 3.2% estimate and the European Commissionʼs 2.4% growth forecast. Hungary will again grow well above its trend this year, on a possible shift away from (state and EU funds financed) investment towards private consumption, and net exports. Like the rest of Central Europe, Hungary stands to benefit strongly from the improvement in the euro zone and its trade links with Germany are strong in particular, Morgan Stanley noted. The house sees some investment-induced slowdown in growth to 2.5% next year, but up from its earlier call for 2.3%, with upside risk to both GDP growth forecasts.

Raiffeisen Bank also saw Hungaryʼs 1Q GDP growth "well above" 3% in a note on Monday.

OTP again led the pack after legislation showed that banks would not be obliged to pay upfront to top up an investors insurance pool as was initially feared. Following bankruptcy procedures against three local brokerages, the compensation capacity of the insurance fund financed by the financial sector will be raised partly through bonds to be issued by the fund, and partly by money that pool members could borrow from the central bank for a ten-year maturity for the purpose, and they could also seize some assets of the failed brokerage houses.

Under a February agreement with Erste Bank and the European Bank for Reconstruction and Development (EBRD) involving the government and EBRD taking equal minority stakes in Ersteʼs Hungarian unit and a government pledge to reduce the special bank tax from next year, Hungary has also agreed to refrain from new laws or measures that may have a negative impact on bank sector profits.

OTP soared 8.03% to HUF 5,944, its highest close since July 4, 2011, on turnover of HUF 17.54 bln from a HUF 25.85 bln session total, more than two and a half times the daily average this year.

MOL surged 5.08% to HUF 14,690 the highest close since November 8, 2013, on turnover of HUF 4.79 bln.

Magyar Telekom improved 1.42% to HUF 430, a two-and-a-half-year closing high, on turnover of HUF 405 mln.

Richter advanced 3.61% to HUF 4,310, a nine-month closing high, on turnover of HUF 2.93 bln.

The bourseʼs mid-cap BUMIX went out 0.55% higher at 1,586.82.

Elsewhere in the region, WIG 20 in Warsaw was down 0.05%, while Pragueʼs PX gained 0.58%. Western Europeʼs major indices were mixed ahead of their close Monday, with FTSE-100 in London down 0.37%, DAX30 in Frankfurt down 0.18 %, and CAC40 in Paris up 0.32%.