The Hungarian capital market is facing several challenges in addition to already losing a major group of institutional investors as a result of the recent pension reform.
In recent months, liquidity on the Budapest Stock Exchange (BSE) has seen a sharp decline, primarily because the transfer of private pension savings to the state has cut demand and driven investors away. While private pension funds will not return, foreign investors might come back, provided that the measures outlined in the government’s Széll Kálmán Plan are followed through.
Equity turnover on the BSE fell to HUF 19 billion per day in April from HUF 22 billion a year earlier, the lowest April turnover since 2008. March turnover fell 53% year-on-year to HUF 14.3 billion. The transfer of the pension funds, worth about HUF 3 trillion, or 10% of gross domestic product, is to be completed in June.
Michael Buhl, the head of the CEE Stock Exchange Group (CEESEG), which the BSE is a part of, foresees a 25% drop in Hungarian stock turnover, up from the previously expected 5%. Viktor Zsiday, chairman of the recently listed asset management company Plotinus, believes that even the 25% figure is a conservative estimate.
The elimination of the private pension funds will seriously damage the Hungarian capital market, but it will certainly not be fatal, as there are still other institutional investors out there, such as voluntary pension funds, insurance companies and investment funds. The entire sector will be hurt and a few brokerages will disappear as well, Zsiday said.
The first such victim was Cashline, whose owner Ottó Albrecht said that the fall in turnover on the BSE, the extraordinary financial sector levy and the discontinuation of the country's private pension funds meant there was no outlook for growth on the market.
Desperately seeking new issuers
In order to develop the local capital market and increase liquidity, the BSE worked out a five-pronged strategy at its annual general meeting held on April 29. The strategy includes joining the common trading platform of CEESEG and thus expanding the circle of traders, broadening the base of issuers, increasing the efficiency of data vending and strengthening the domestic investor base. The strategic goals have been similar for quite some time now, but they have not resulted in much improvement over the past few years, with only one real IPO in 2010.
In case banks’ current lending policies remain unchanged, more and more companies will seek alternative financing, according to Bálint Szécsényi, the CEO of brokerage house Equilor. “We are working with several firms that have been considering a listing for a long time, but have not made the final decision yet due to various reasons, such as unfavorable pricing or bad timing.” Similarly to the Warsaw Stock Exchange, the minority stakes of certain state-owned companies could also be floated on the BSE without giving up control, he added, “I expect three to five new listings on the BSE this year.” Zsiday deems the floating of Plotinus very successful; "We now have about 300 owners and the average daily turnover has reached approximately HUF 2–3 million.”
Plotinus has investments in Hungarian and foreign money and capital markets, but it also owns other assets, including a two-thirds stake in a spinal clinic in Budapest. However, the company is not specialized on the health sector, and is interested in investment targets in every sector.
Márton Radnai, the CEO of financial software provider Ramasoft, is very pessimistic about new issuers on the BSE. He pointed out that there are no more potential big companies, as they are either already on the bourse or in foreign ownership. In turn, SMEs, the only potential base of issuers, were hit the hardest by the pension reform, which wiped out domestic institutional investors. “It is not easy to be a Hungarian entrepreneur at the moment, as financing is practically unavailable both on capital markets and in the banking sector,” he noted.
A question of time
“The most important development on the BSE would be the introduction of the Xetra trading system, however, this has been successfully delayed so far by local brokers,” Radnai said. Xetra is an international trading platform used by over 250 financial firms and 4,800 stock brokers, with investors having direct access to the system from 18 countries in Europe and one in the Middle East. Buhl claims that by using just one internationally renowned system, it would be possible to bring international remote members, which would significantly increase transactions and trade volume.
Radnai pointed out that this is exactly what bothers local brokers the most, as with the entrance of the major London brokers they would lose most of their foreign customers.“The introduction of Xetra is only a question of time, as it has no technical obstacle, only the consensus is missing,” Radnai said. Brokers have been threatening the BSE’s owners that they will go elsewhere, which, he believes, is the main reason behind the recent opening towards Warsaw.
The Polish bourse is one of the last independent stock exchanges where brokers can go if they lose their foreign clients at home. Cashline used to be the main brokerage serving foreign customers, followed by Concorde and K&H Equities. After Vienna, Xetra was implemented on the Ljubljana Stock Exchange in December 2010, and Prague and Budapest are expected to follow suit. Having a common trading platform instead of four different systems would lead to cost savings and higher revenue. The four stock exchanges of Vienna, Budapest, Ljubljana and Prague were integrated as subsidiaries into the holding company, CEESEG AG, in January 2010.
The Warsaw Stock Exchange (WSE) is certainly ready to make the most of the falling turnover on the Hungarian bourse, and is encouraging companies doing business there to debut on the Warsaw floor. Ludwik Sobolewski, president of the WSE, told Polish daily Parkiet that Hungary is an extremely important market and they will organize at least one roadshow this year to Hungary, Austria, Slovenia and Croatia.
Currently, there are two Hungarian firms quoted on the WSE, including oil and gas company MOL and energy service company E-Star, which floated its shares there this March. E-Star plans to enter the Polish market by making acquisitions this year and expects Poland and Romania to be its biggest markets by 2015. Other Hungarian blue chips, such as OTP Bank, Magyar Telekom and Richter Gedeon, as well as energy company PannErgy, are reportedly also considering a dual listing in Warsaw.
Multiple listings will not hurt the BSE, as one security is usually traded on one exchange, Equilor’s Szécsényi said. Hungarian blue chips consider a WSE listing because they seek investors to finance their local projects, as well as for marketing reasons. Institutional investors do not care where a stock is listed if it is a valuable security. “Investors can be found anywhere, I do not have to float my shares in London if I want to find British investors,” he noted.
Foreign institutional investors account for 60–70% of the BSE’s turnover. “I believe that the vast majority of the trading volume in Hungarian equities will remain on the BSE,” Zsiday said. With dual listings, investors are simply hoping to attract an additional investor base to offset the losses caused by the elimination of the Hungarian pension funds.
There have been several rumors about the establishment of an alternative stock exchange in Hungary. “These are unfounded threats, just some emotional reactions,” according to Radnai. Although no one takes these rumors seriously, according to an amendment passed in January, the “relocation” of shares from one exchange to another will be both easier and cheaper. “There were a couple of major Hungarian companies that felt threatened by the Austrian owner and they wanted to ensure a way out for the worst case scenario, such as the acceptance of a hostile takeover attempt,” said Zsiday.
“If we look at the BSE’s last AGM, the previous battles have disappeared and market players now seek consensus,” Szécsényi noted. Disagreement and the lack of cooperation will not support the development of the Hungarian capital market, he added.
“Integration is the future,” Szécsényi said when asked about the rivalry between the WSE and the CEESEG to be the best bourse in Eastern Europe. There are several trading platforms outside the exchanges now, and if the bourses are not competitive enough, the classic trading methods will disappear, he noted. Radnai agrees, saying that both exchanges will probably be acquired by an even bigger group.
“The WSE is too good to be acquired by the CEESEG, it will join either the NYSE Euronext or the Nasdaq OMX group.” Buhl recently refuted news of a possible takeover that emerged following reports that Wiener Börse was approached by two major stock exchange operating firms.