Investing in Hungary Via This Telecom Play (MTA)

Roger Nusbaum submits: A few times in the past I have mentioned Hungary as a possible investment destination. There is one NYSE listed ADR that I have been following for a long time called Magyar Telekom Telecom Plc. (NYSE:MTA). The stock has not done much in a while, but has a very high yield.

One concern I have had about the stock has been that the dividend has been more than the earnings. This no longer appears to be the case. However, as it turns out, the payout exceeding the earnings was never a big deal. A while ago a reader passed along information that MTA has a very involved relationship with Deutsche Telecom (DT) such that DT has put a lot of money into MTA as sort of a long term commitment.

This chart compares the benchmark BUX index to the S&P 500 for the last four years. For the first couple of years the correlation looks kind of close then as emerging markets got hot, the BUX separated from the S&P:

Hungary is front and center in the Eastern European theme. The country is growing quickly, it is modernizing, labor is cheap (compared to Western Europe, but not compared to Slovakia) and while it will never play a dominant role on the world stage it's role will be bigger than it is now.

One step to bigger would be if Hungary can join the EMU -- it hopes to do this by 2010. Inflation is running below the 3% target, GDP has been growing in the 4% area for awhile and direct investment in Hungary has been on the rise. Hungary is one of the high yielding currencies, as 3-year bonds yield more than 7%. High yields could attract more foreign capital.

Hungary has a couple of warts: The current account deficit is a problem at 5% of GDP with visibility for it to increase. The various ratings agencies have all downgraded the outlook or the actual debt in the last few months. The currency (called the forint), like the kiwi and the Icelandic krona, has recently weakened against the dollar:

The correlation of the forint to the kiwi is interesting in that I think it shows that structural economic problems may trump commodity-based diversification. However, even though the currencies have traded similarly, the two stock markets have not:

If you want more information about Hungary I would suggest the Magyar Nemzeti Bank (the central bank) and the Budapest Stock Exchange.