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The government crisis is over – what lies ahead for Romania?
Romania has experienced five turbulent months on the domestic political front. Nevertheless, after several prime ministerial candidates failed to secure parliamentary support, a new government was finally formed in late October. The Romanian equity market, which had performed strongly during the first half of the year, lost momentum towards the end of August and entered a downward correction in September. It then rebounded in October, partly reflecting the reduced risks of a snap election and a sovereign rating downgrade to below investment grade. While domestic political tensions have subsided, the BET index has yet to recover to the vicinity of its August peak. At the same time, Romanian equities no longer appear particularly inexpensive from a valuation perspective.
Commodities - Technical Analysis
Signs of a turnaround have emerged for gold and silver, and a strong upward move could trigger the next upward wave. A breakout above the key downtrend lines could also be on the horizon, which would further reinforce the positive turnaround. The price of oil has broken below the 100-day moving average, weakening the bullish outlook, and with the uptrend broken, it has entered a correction phase. Natural gas is showing a correction following a sharp decline, but has not yet managed to break through its downtrend line. Copper continues to trade within a wide range and is approaching the lower end of that range. Following a significant decline, wheat and corn prices have reached key support levels from which an upward correction—or even a new uptrend—is likely to begin.
In the short term, the negative impact of tariffs coupled with elevated valuation levels, have increased the risk of a mild correction. However, as the threat of recession is moderate, the fiscal and monetary policy are supportive, commercial bank lending is improving, we would maintain neutral equity exposure and look for buying opportunities during corrections.
Macro
US growth got slower, but less, than expected, and as fiscal policy remains loose and interest rates will be cut further, a drastic slowdown looks less likely. The eurozone economy will manage a soft landing in H2, and growth could reaccelerate by the end of 2026. In Europe, headline inflation is back on target, but in the US, inflation is diverging from the target, and tariffs will drive it further up. ECB’s rate cutting cycle has ended at the neutral level of 2%, in case of the Fed, the priced in rate trajectory looks to be overly optimistic. Hungarian GDP growth could reach 0.6% in 2025 and ~3% in 2026, thanks to a large fiscal stimulus, which may push the deficit above 5% next year. In 2026, inflation may return back to the target level, however risks are tilted to the upside. The market expects 75-100 bps rate cuts by the MNB, but we think 6.5% will be kept for longer. Till December, HUF long positions looks to be more attractive, however after the last rating action in December this could change due to election risks.
Equities
In the short term, the negative impact of tariffs coupled with elevated valuation levels, have increased the risk of a mild correction. However, as the threat of recession is moderate, the fiscal and monetary policy are supportive, commercial bank lending is improving, we would maintain neutral equity exposure and look for buying opportunities during corrections. Although the US market is the most expensive, profit dynamics are strong, so we do not expect a sustained downturn. Encouraging developments are emerging in Europe, but there are still obstacles to overcome, which prevents outperformance. The weakening of the dollar and the Fed's interest rate cut are tailwinds for EM, but they are no longer cheap, and profit momentum is deteriorating. Although CEE related risks are increasing, investors are still compensated by the depressed valuations.
Bonds
As there are no signs of recession in either America or Europe, we recommend choosing the short/medium end of the yield curve in developed countries due to high budget deficits, rising debt trajectories, and political pressure on the Fed. We do not consider corporate bonds attractive due to narrow bond spreads.
Commodities
We maintain an overall neutral view on commodities due to various uncertainties surrounding the global economic outlook from US labor market to Chinese growth prospects. Several markedly different outcomes are possible, hence some caution is warranted. We recommend selective exposure (e.g., gold, copper, uranium).
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