The geopolitical uncertainty due to the issue of the Strait of Hormuz will remain with us for a while, but the situation is better than what can be inferred from the news at the moment, and the European Central Bank would make a mistake by raising interest rates. After the change of government, the Hungarian economy is in a grace period, the key question is how long this will last. Amundi Alapkezeló held a press conference where they made several generally optimistic statements about the current state of the global and Hungarian economy, different from the analyst consensus. According to the fund manager, the growth rate of the Hungarian economy may be 1.4 percent this year, the Czech one will exceed 2 percent, and the Polish one 3 percent, but by 2027 we are expected to be only one tenth behind the Polish figure.
The worst scenarios did not come true
Although crude oil traffic has fallen due to the double blockade of the Strait of Hormuz, the situation is not as terrifying as it could have been anticipated, the worst scenarios outlined in advance did not come true, said Péter Kiss, Amundi’s investment director. So far, the world economy has proven to be resistant to the oil crisis, the reason for this being that both the demand and supply sides were able to adapt.
The price of oil will be heavily influenced by when and how the conflict is resolved, but oil stocks will temporarily ease the pressure on the market. Currently, it is not known exactly how many ships pass through the strait that do not appear in the official records, according to Reuters before the outbreak of the war, an average of 125-140 ships crossed, in mid-May 10 ships a day were typical. Péter Kiss added that it is difficult to determine the exact number, since none of the warring parties has an interest in reporting on the passing traffic, and the parties are making good money from the increased oil price.
Seen from Europe, the price of crude oil is less important, but that of gas. The outage of Qatari gas was particularly painful, but it is only a relatively small part of European consumption. Replenishment has started, and LNG imports from the United States and North Africa to Europe have also increased. From 2027, a large amount of LNG capacity will enter the market, which may slightly restrain the rise in prices, at the same time, the acceleration of inflation may be smaller compared to the energy crisis of 2022, if only because the initial inflationary pressure in the economy is much lower.
It is not expected that the gas price will take off like in 2022, because in 2027 large LNG capacities will come on the market, the largest part of which will come from the United States, and this will restrain the rise in prices in Europe.
Global central bank tightening may be coming
All in all, therefore, Amundi does not expect a recession anywhere in the world, it is certain that growth expectations have gone down in all regions, and inflation expectations have gone up. Accordingly, the market is pricing in tightening everywhere at the most important central banks, especially at the European Central Bank (ECB), but according to Amundi experts, this would be a wrong step, as the spike in inflation is seen as temporary, wage pressure is decreasing, and growth is low. The ECB can think about raising interest rates in two or three rounds, Tamás Wéber, portfolio manager of the fund management bond, later added that it is a supply shock, and the fact that the central bank raises interest rates will not add fuel, shocks like this should just be looked at.
According to Amundi, the Fed will not increase rates in the next year, and the reaction of the central banks of developing countries is mixed, but tightening is more typical. There are a few exceptions, including the Hungarian central bank, and the market and Amundi expect relief from the Hungarian National Bank. And if the Iranian conflict ends, the dollar may begin to weaken, which could be an important tailwind for emerging market instruments.
The Hungarian economy is in a grace period
The Hungarian economy is currently surrounded by euphoric optimism, the forint has been strengthening since the elections, the yield spread on government bonds has fallen spectacularly, and the assessment of the situation by international investors remains positive. The question is how long this period, which Péter Kiss characterized as a “grace period”, can last and what performance the new Hungarian government will produce in the coming months. This is also evident from the fact that the basis of comparison is no longer the level of the Romanian bond yield, but the Polish interest rate. Around 2016-2017, there was an example where yields remained permanently below the Polish level, this may happen again now, as a unique change is taking place on the governmental scene, which may affect monetary policy and our approach to the Eurozone may also give cause for optimism.
However, it should also be noted that the regional currencies (such as Polish and Czech) have strengthened much more than the HUF in recent years, adjusted for inflation, Kiss said. The forint did not completely make up for this lag even after the strengthening of the last two months, therefore, although the forint may seem overvalued in the short term, there is still room for further strengthening.
What has held back the domestic economy in the past 2-3 years – the declining production of industrial production, including the production of battery plants – may change now, due to the oil price shock, the demand for electric cars may start, and with the increase in the world’s energy demand, the demand for batteries will gain new momentum. Many energy network developments are expected, which can give the Hungarian economy a tailwind in the longer term. A growth rate of 1.4 percent is expected from the Hungarian economy this year, and 2.7 percent in 2027, which may just fall short of the Polish figure: by 2027, Amundi expects the Polish economy to grow 2.8 percent, and the Czech economy to grow 2.4 percent.
When asked what could break investor confidence in the Hungarian economy, for example, how relevant is the budget deficit at the end of this year, Tamás Wéber said that, in his opinion, the medium-term path matters. Finance Minister András Kármán has already spoken many times about the fact that, according to their intentions, the Hungarian economy must meet the Maastricht criteria by 2030. According to Wéber, this requires an authentic and reliable path that will bring it below the 3 percent deficit target. Tisza’s social and economic commitments – school start support, VAT reduction, etc. – according to him, it should be performed judiciously and carefully, the measures should be introduced in such a way that they are covered. According to the portfolio manager, 0.5-1 percent of GDP could realistically be saved on public procurement and media spending, but these are not enough for the ruling party to fulfill all its promises.
“You can’t enter the Eurozone with a tax cut,” said Wéber, who believes that the measure should be an element of the social system, so need should be taken into account, but the measure should not affect the macroeconomic trajectory.
Password: strategic independence?
Then the investment prospects were also discussed. According to Amundi, future economic growth will be determined by the new world order, in which every country strives for its strategic independence and tries to make its production independent of global conflicts. This could trigger a huge wave of investment in strategic sectors such as energy, critical materials, infrastructure, defense (and cyber defense), environment and artificial intelligence.
According to Tamás Wéber, artificial intelligence and the sectors that create its background are also part of this infrastructure investment wave. Artificial intelligence is transforming our image of work and corporate efficiency, and according to Amundi experts, the investment fever surrounding it is not a balloon, but it should not be treated separately from the general trends that determine our future, it is only a (admittedly, more dynamic) slice of the investments driven by autonomy.
According to the portfolio manager, traditional economic policy logic is increasingly being superseded by social and defense considerations. Linked to this is deglobalization, the value of securing supply chains increases, and actors are willing to pay a premium for security. An example of this is Norwegian oil production, which in the coming years will partially overwrite purely economic logic, because everyone is trying to keep their own supply chains “in-house”.
Another important megatrend is electrification, which is driven by the energy demand of artificial intelligence, the green transition and considerations of sovereignty (electricity can be produced domestically, thus reducing dependence on oil and gas). Electricity production will ramp up in the coming years, largely from decentralized sources. These must be connected to the network, which requires many high-voltage cables; here, for example, there may be an investment opportunity, since their production is not easy, the market is concentrated, and three European companies cover most of it.
Offshore wind energy is also a good entry point for electrification. The disadvantage of renewables is uneven production, but offshore wind farms produce the most evenly, so they can play a key role in the transition. The market expects a decline and then growth by the end of the 2020s, but new tenders (for example in Great Britain) may bring an upswing sooner.
