Strategy Note /

Hungary: Windfall tax in Orban's state of emergency de-rates equities further

  • Windfall tax on banks (OTP 34% of BUX index), energy (MOL 27%), telco (MTELEKOM 6%). Pharma (RICHT 25%) not mentioned

  • Response to increasing misery index, EU funds risk (rule of law dispute, Russia policy), less fiscal space post Covid

  • Hungary tax revenue was already high vs peers. Equity valuation left even cheaper vs peers after this unexpected move

Hungary: Windfall tax in Orban's state of emergency de-rates equities further
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
26 May 2022
Published byTellimer Research

PM Orban has initiated his new state of emergency with windfall taxes across a range of sectors, ostensibly to fund subsidies for utility bills and military upgrade spending, according to a personal broadcast on 25 May.

Sectors affected include banks (OTP has a 34% weight in the BUX), energy (MOL 27%), and telecom (Magyar Telekom 6%), but pharmaceuticals (Richter Gedeon 25%) has not been mentioned, as far as we are aware.

The Budapest Stock Exchange Index (BUX) is down 4.3%, at the time of writing, and leaves Hungary close to being the cheapest equity market in EM Europe, on trailing PB versus historic average.

Populism, loss of EU funds, fiscal deficit

The drivers of this move are threefold:

  1. Populism in the face of a 10-year high in the misery index — unemployment plus inflation rates.

  2. Compensation for risk that EU Recovery funds are withheld indefinitely — as the Rule of Law dispute drags on, and policies towards Russia diverge so starkly.

  3. Absence of fiscal space with the substantial widening of fiscal deficits during Covid.

Hungary's increasing 'Misery' partly drives Orban's populism

Hungary's high fiscal deficits post-Covid also drive new tax

Hungary already collects a lot of tax

Hungary's tax revenue as a percentage of GDP (22.5% in pre-Covid 2019) was already high compared to EM Europe peers.

Hungary tax collection already high versus EM Europe peers

Hungary equities just got even cheaper

Hungary equities (BUX index) are now down 31% ytd in total US$ terms, making them the worst performer among EM Europe peers. The FX rate is down 12% ytd.

  • Trailing PB is 0.8x (for trailing ROE of 16%), a 35% discount to the 5-year median.

  • Forward 2022e PE of 6x is a 42% discount to the 5-year median. A cut of 25% to consensus earnings forecasts would imply forward PE of 7.4x, still a c25% discount to the 5-year median.

  • A reversion to the 10-year median real effective exchange rate (REER) would imply close to 20% upside for the spot FX rate.

Hungary equities on a c40% discount to 5y median PE

After its underperformance, Hungary is now almost the cheapest equity market in EM Europe.

Hungary equities cheaper vs history than EM Europe peers

Related reading

Hungary: Orban's big win is unexpected, April 2022

Hungary: Orban's Fidesz favourite to win tightest election since 2006, April 2022