What could the budget announcement mean for the BUX Index?
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Hungarian government is expected to present the 2027 budget early this afternoon (13:00), an event that could prove pivotal from a market perspective. The outcome may determine whether the euro convergence story, which has already been priced in by markets this year, can continue. If the government outlines a sufficiently ambitious and credible fiscal deficit path, it could trigger further repricing in both the bond and equity markets, potentially unlocking significant additional upside. We examined what this could mean for the BUX Index.
At the end of the day, the direction will not be determined by a single deficit number alone. The credibility and composition of the fiscal consolidation path will be at least as important, although the deficit target itself is likely to carry significant weight. From this perspective, a deficit level of around 5% of GDP could serve as a key dividing line. Since the temporary, one-off factors that inflated this year's deficit will no longer be present, the 2027 budget deficit is expected to decline to around 5.2% of GDP even without major additional fiscal measures (which is also roughly in line with the current market consensus). Therefore, a target set around this level would likely be viewed as neutral, while a more positive market reaction would probably require a deficit target below the 5% threshold. That said, the fiscal trajectory should also point toward meeting the Maastricht criterion of a 3% deficit-to-GDP ratio by 2029.
Naturally, a higher deficit target could trigger significant volatility in both the equity and bond markets. For now, however, let us consider the more positive scenario and examine what kind of re-rating potential it could unlock for Hungarian assets. The short answer is that the upside could be substantial. That said, it is important to add that such a revaluation would not occur overnight. Moreover, if adverse developments were to emerge globally or within the region, or if the fundamental outlook of Hungary's four dominant blue-chip stocks (OTP, MOL, Richter, and Magyar Telekom) were to deteriorate, the Hungarian market could easily deviate from this theoretical path.
The re-rating effect could come from two sources. First, through a decline in long-term government bond yields, and second, through a reduction in Hungary's equity risk premium. Bond market convergence is already well underway: following a 150-basis-point decline since the beginning of the year, the 10-year government bond yield now stands at around 5.4%, below the Polish level and broadly in line with Czech yields. However, eurozone bond yields remain even lower. French and Italian sovereign yields, despite significant volatility, are currently in the 4.5-4.8% range, while Croatian and even Greek yields trade around 4.1-4.3%. Therefore, if the government presents a fiscal path that is well received by investors, long-term Hungarian bond yields could gradually fall toward similar levels over the coming years. Such a move alone could justify a re-rating of roughly 15%, implying a BUX Index level around 165,000 points.
The second channel is the potential compression of the equity risk premium. At present, the Hungarian market trades with the highest equity risk premium in the region, at around 5.7% (based on forward earnings expectations and despite its relatively depressed valuation levels), meaning that an improvement in investor sentiment could leave considerable room for further compression. Prior to 2022, this metric generally traded in line with Polish levels, which currently stand meaningfully lower, at below 3%. A re-rating of this magnitude could, even without any decline in bond yields, justify roughly a 20% appreciation, implying a BUX Index level of around 180,000 points. If bond yield convergence were to take place at the same time, valuations could ultimately support levels above 200,000 points. Such a scenario would likely unfold gradually over an extended period, potentially spanning several years, rather than materializing all at once.
If we use the consensus target prices available for the individual blue-chip stocks as a starting point, a 15% re-rating at the BUX Index level appears readily achievable also with a bottom up perspective. Moreover, looking at the major constituents on a standalone basis, valuation metrics suggest that the upside potential could be even greater for several of these stocks. This could provide additional support for the BUX Index to reach the previously outlined 160,000-180,000 point range over time.
It is important to recognize that both the external environment and company fundamentals may change in a negative direction over time, potentially causing the index to move away from this trajectory in a downside scenario. For example, if achieving the targeted fiscal path were to rely on higher corporate taxation, and/or with growth sacrifice this could pose downside risks to corporate earnings and, consequently, to equity valuations.
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