Our Global Head of Fixed Income Research Andrew Sheets breaks down how Péter Magyar’s win in Hungary’s election could smooth relations with the EU and lower the risk premium in the country’s assets.

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Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley. 

Today on the program, how we’re thinking about the market implications of a recent election. 

It’s Thursday, April 16th at 2pm in London. 

Hungary has about the same population as New Jersey. And yet its elections last weekend commanded global attention. The contest pitted the party of Viktor Orbán, who had served as Prime Minister since 2010, against a former protégé turned rival, Péter Magyar. 

As a sign of the global importance and as a referendum on the future of Hungary and its place in Europe, this vote was seen as significantly important that the U.S. Vice President flew in to campaign on Orbán’s behalf. 

Among the issues at stake were Hungary’s relationship with Europe’s broader political and economic architecture. Hungary has been a member of the European Union since 2004, but has frequently clashed with the bloc under Orbán’s tenure. This has European-wide implications, as a number of key EU procedures – including the levying of sanctions, defence policy, and enlargement – require unanimous approval among member states. A single dissenting vote, from Hungary or anywhere else, can prove highly disruptive. 

This month the European Commission President proposed moving forward with changing the voting system and linking it more closely to population. But there’s a wrinkle… This change would still need to pass by unanimous vote. 

So back to the election. The result was a landslide win for the opposition, with Péter Magyar’s party securing 138 out of 199 seats in the National Assembly. The shift in leadership, the first since 2010, and the scale of the majority, have meaningful geopolitical implications for Europe. But since this is a markets-focused podcast … we’ll focus on the markets. 

First, new leadership in Hungary may mean warmer relations with the European Union. And that could mean money. Unfreezing access to EU funds, one of the new government's policy goals, could result in 1 to 1.5 percent higher potential GDP growth for Hungary, per Morgan Stanley economists. And the new government has also proposed taking steps to adopt the Euro as its official currency. 

Both of these developments could help reduce the risk premium embedded in Hungarian assets. While Hungarian interest rates fell and its currency appreciated following the vote, our strategists think that both could move further – with interest rates falling a further 0.5 to 1 percent, and the currency appreciating a further 2 to 4 percent. And while Hungary is a pretty small equity market in global terms, it is one that our strategists like, and are overweight.

Hungary’s recent election attracted global focus. While much remains to be seen, the prospect for smoother relations with the rest of Europe is a positive for both Hungary's assets and the Bloc as a whole. 

For different reasons related to Energy uncertainty, relative earnings, and relative monetary policy, we do continue to prefer U.S. equities and government bonds over their European counterparts. But as a longer-term story in Europe that’s important to watch, we think this definitely qualifies. 

Thank you, as always, for your time. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen. Also tell a friend or colleague about us today.