BUDAPEST - The combination of improving macroeconomic indicators and an extraordinarily successful privatization push in 1995 has catapulted the Budapest Stock Exchange index up 57% so far this year to 2405.26.
But investors who have enjoyed the bull market have stopped adding to their positions, and in some cases are shedding Hungarian stocks because they believe further upside potential is limited.
"I would have to say the market is fairly valued at this point," said Rory Landman, manager of Barings Emerging Europe Trust, a $100 million fund, London. Twelve percent of the fund's assets are in Hungary, an amount Mr. Landman doesn't expect to adjust soon. "I just don't see a long way up from here," he said.
The fortunes of the Budapest Stock Exchange, BUX, have dramatically turned around since last year when investors fled the market because of the Mexican crisis. Last year, the BUX rose 3.2% to 1528.92.
However, now that emerging markets are again fashionable, Hungary's triumphs at the end of 1995 attracted investor attention.
After a major privatization disaster at the end of 1994, Hungary pushed through four major privatizations late last year, bringing total revenue from state asset sales to $3.4 billion, twice the expected figure.
That accomplishment was enhanced by Hungary's fiscal improvements. Last year, the country's current account deficit fell to $2.5 billion or 5.5% of gross domestic product from $3.9 billion or 9.4% of GDP. The trade balance tumbled to $2.2 billion from $2.6 billion, while foreign reserves grew to $12 billion from $6.8 billion. Those improvements were the result of an austerity package introduced in March 1995 that devalued the forint, cut social spending and added an import tax.
The architect of the package was Finance Minister Lajos Bokros, an aggressive reformer. When he resigned unexpectedly in February, the BUX fell 5% to 2005. Some feared the rally would end there because Hungary wouldn't stay with Mr. Bokros' austerity program. But the market didn't melt down, and it jumped almost 6% when Peter Medgyessy, a reform-oriented banker and former finance minister, was named to replace Mr. Bokros. The BUX hit a new high March 18 when the International Monetary Fund approved a $300 million standby loan for Hungary. Hungary is slated to join the Organization for Economic Cooperation and Development in the spring.
"The long-term direction for the country is positive," said Spencer Jakab, an analyst at CS First Boston in Budapest who thinks the market could rise an additional 17% to 22% this year.
Indeed, the BUX's rise has outpaced that of its neighbors. Poland's exchange has advanced 45% to 111,801, while the exchange in the Czech Republic has jumped 11% to 484.3.
Nonetheless, investors say it will be difficult for Hungary to match the rapid pace of its economic improvements this year.
Furthermore, there are several factors that trouble investors about Hungary.
First, the overwhelming majority of the money invested in the Hungarian stock market is foreign, which is not the case in either Poland or the Czech Republic.
"I want to see more local money in this market,' said Stephen Watson, an analyst with Prometheus, a $10 million Eastern European fund that has reduced its holding in Hungary to about 7% from 15% in the past three months. More local money would buffer the BUX against the whims of international investors.
"You just never know what they foreign investors are going to do," said Mr. Landman.
The Hungarian government last year approved measures that launched private pension and mutual funds. However, these funds invest in government paper because they can outperform Hungary's 28% inflation rate.
The inflation rate, as well as one-year interest rates of about 30%, also trouble Mr. Watson. He said such high interest rates make it difficult for companies to invest in marketing, development and technology.
All investors point out that only about 15 of the 44 companies listed on the Budapest Stock Exchange are liquid enough for purchase consideration. According to Mr. Landman, Hungary's neighbors are in similar shape: Only 20 of Poland's 60 listed stocks and 55 of the Czech Republic's 1,600 listed stocks are liquid enough for investment. He only likes about 10 to 15 companies on the Czech exchange, he added.
He said Poland's stock market is better regulated than Hungary's market, but both have more strident rules than those governing the Czech Republic exchange.
Poland also get kudos for its large population. It has 40 million people while Hungary has only 10 million.
Some investors believe Polish companies have an advantage simply because they have a larger sales market. However, most of Hungary's star performers are export oriented. The devaluation of the currency has helped pharmaceutical manufacturers such drug makers Egis Pharmaceuticals Ltd. and Chemical Works of Gedeon Richter. Egis is up 70%, while Gedeon has advanced 79% so far this year.
But the best performer on the BUX and a favorite among the international set is Pannonplast Rt., which has soared 97% this year.
Pannonplast makes construction materials, and analysts say it will benefit from a housing boom in Hungary and the region. It also is aggressively pursuing business relationships in the former Yugoslavia so it can reap rewards from the reconstruction efforts there. Mr. Jakab says Pannonplast is trading about 10 times his 1996 earning estimate and expects profits to jump 19%.