| Andras Simor | ||||||
Talk to analysts outside Hungary and they express mystification at what they see as the country’s apparent lack of support for the development of its stock market. Part of the problem, they say, is that economic growth is being driven so forcefully by inward flows of foreign direct investment (FDI), which in turn has the effect of diverting companies away from the Budapest Stock Exchange (BSE). “Inflows of FDI practically never manifest themselves in new stock market listings,” says Frances Cloud, analyst at Nomura in London. “If they take the form of greenfield factories the companies in question don’t list on the market, and if it’s a question of taking over a local company it usually means the delisting of the stock. We are getting to the point in Hungary where some of the biggest companies are effectively disappearing from the stock market because their free floats are diminishing to practically zero.” The problem, says Cloud, is especially pronounced in the chemicals sector.
Over and above this, say bankers, there are growing doubts about whether or not the government even believes a stock market needs to be a priority. Says one analyst: “That is pretty short-sighted because what the authorities ought to be doing is encouraging smaller and medium-size companies to list in order to take the place of the bigger ones that are being swallowed by international investors.” Specifically, says the same analyst, Hungary could do a good deal more to support the development of its stock market by tightening up on issues such as the rights of minority shareholders.
When Euromoney raised these issues in mid-December with Andras Simor, chairman of the Budapest Exchange, he began by emphasizing the two professions with which he is not associated. First, he says that he is not a broker and is therefore reluctant to remark on stock market valuations. Second, he insists he is not a politician and therefore prefers not to pass judgement on the political support (or lack of it) for the development of the market. “I want to keep out of politics because we have to work with every government we have, whatever its colour – and we have a habit of changing our governments quite often in Hungary,” he says.
None of this is to suggest that Simor is reticent when it comes to defending the track record of the Budapest bourse. “What people have to realise is that Hungary has been quite aggressive in terms of privatization,” he says, “and maybe more so than a lot of other countries in the neighbourhood. And I mean that in two ways. One, that we have gone through privatization faster than others. Two, that we have been less cautious than others in terms of controlling or limiting inflows from foreign strategic investors. That means that a lot of companies that could have gone to the stock market, and which in our neighbouring countries may have listed on the market because they wanted to maintain their national character, have not gone to the market in Hungary but have been sold instead to foreign investors. Because privatization has moved faster than it has elsewhere, the government is no longer in a position to support the stock exchange through new listings, because they don’t have much left to list.
“But if you look at the size of Hungary’s stock market relative to GDP, it’s about 30%,” Simor continues. “Compared with other countries in the neighbourhood, and even compared with Austria, that’s a fairly high number.” It is even high, he says, relative to Germany, which in the pre-Deutsche Telekom days hovered in the 20s. “Germany is now about 60% or 70%, but what you have to bear in mind is that market capitalization as a percentage of GDP is calculated according to two factors,” he adds. “The first is how big a part of the economy is listed, and the second is the share price of the company. Obviously the P/E ratios in Germany are much higher than in Hungary, so if we had German valuations rather than Hungarian ones we would have much closer to 50% or 60%. For a stock exchange which is only 10 years old, I don’t think that’s bad.”
What Simor does concede is bad is the lack of interest shown in the market by new entrants. “I think the reason for this is that the private sector in Hungary started pretty much from scratch, and apart from a few hi-tech companies it looks as though it is taking longer than expected for these companies to reach the size needed to list on the exchange,” he says. “We’ve had 10 years of economic reform and obviously the first three or four years were not productive in terms of development for most Hungarian companies. It was rather a question of companies surviving and trying to find their feet in the new world. So in practice we’ve had five or six years of being a successful economy. But I think new listings are a question of time rather than anything else. I strongly believe it’s a matter of when rather than if, and I’m not talking about ex-state owned companies, but home grown stuff.”
If the economic growth rates now being projected by some Hungarian economists are realized – and some are suggesting that the economy could grow by up to 6% annually over the coming few years – Simor may well be right about this. But if the BSE is to expand and prosper, it needs support from at least two sources. First, it needs to ensure it can fend off competition from elsewhere by maximizing its own efficiency. Second, it needs broad-based and lasting support from institutional investors locally as well as from abroad.
Simor insists there is absolutely nothing wrong with the BSE’s infrastructure. Far from it. “We have systems that are as good as anybody’s,” he maintains. “We have a remote electronic trading system which is also integrated. In other words we have equities, bonds, derivatives and cash on one system and most stock exchanges do not have that. We’ve done everything necessary to be competitive. We’ve extended trading hours and recently we’ve abolished listing fees to encourage more companies to come to the market.”
Simor is reluctant to talk about newer competitors such as the Vienna-based Newex venture, but he says that recent precedent suggests that the BSE is the rightful first market of choice for Hungarian companies, citing software company Graphisoft as a case in point. Graphisoft is the prodigal son of Hungarian hi-tech, having originally listed its shares on the Neuer Markt in Germany before opting for a dual listing in Frankfurt and Budapest. “I haven’t checked the figures in detail but I think there is more turnover now in Graphisoft shares in Budapest than there is in Frankfurt,” says Simor, “and the company certainly gets much more coverage from analysts than it did before it listed on Budapest.
If you compare how many brokers covered Graphisoft when it was listed on the Neuer Markt and how many cover it now there’s just no comparison.” Simor says that this added coverage is not just from domestic brokers distributing research in Hungarian: “Interestingly quite a lot of the American and UK brokerage houses started to cover Graphisoft when it was listed on the Budapest market.”
