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Investor Overview January 2022

Investor Overview

2022 will be a year of duality, and not only in numerology but also in economics. The fight against inflation and the economic recovery after the covid will be one end of the scale.

Investor Overview January 2022



This article is for informational purposes only and is not intended as investment advice. It is not a calling to buy or sell individual financial instruments. If you would like help with this, please contact us to speak with a licensed employee.

Impact of inflation on the macroeconomy

The causes of inflation remain largely unchanged, including:

  • high raw material and energy prices,
  • a significant difference between supply and demand.

A fight against inflation is needed, which will require higher interest rates and tighter central bank reactions. But at the same time, the engine of the economy must not be stopped, which means a completely opposite economic policy.

At present, both the United States and the European Union are defined by this balance-seeking duality.
The result of this duality is:

  • the ECB will not change its current interest rate levels until inflation reaches 2% on a lasting basis, but will rearrange their asset purchase program slightly as their steps are no longer needed due to the pandemic
  • the Fed has not changed interest rates either, but due to inflationary pressures, their asset purchase program is expected to run out in March

Low interest rates mean a bit more room for maneuver, and higher inflation legally results in lower real yields (even if you are not making a negative return). Inflation-generating investments have a higher level of risk, and their selection requires caution in the current environment. The risk can be reduced by choosing time horizons (planning for the long term) and making appropriate use of diversification.

This duality is not very good news for investment, after all, this duality makes it less predictable which step will benefit you in the long run.


The appearance of the omicron variant in November was alarming at first, after all, the delta had just faded away and the news was immediately that the effectiveness of the vaccine against the omicron was questionable. But in addition to the high rate of spread, the mutation, which shows milder symptoms compared to previous versions, also fills investors with confidence.

In previous periods, technology companies soared. Typical reasons for significant capital inflows:

  • they were able to provide and thus produce during quarantine, and there was a significant demand for their services
  • In a low-yield environment, the discount rate was low, so long-term cash flow increased.
  • people could not or did not dare to consume, but money sought its way

Capital has flowed into these companies in previous periods, which shows three things:

  • this raising of capital has taken place at the expense of other sectors, ie currently undervalued securities have to be sought elsewhere
  • offline life has started, so there is no longer such a demand for their services, but the return environment has increased, so the return on these stocks has been lower
  • people are now buying offline things, so other sectors can be expected to recover.

This is why technology software companies have started to plummet, which is most spectacularly summarized in the ETF price curve based on them:

IGV ETF exchange rate


In the area of ​​equities, there is a kind of rotation between the stock market sectors, ie capital is migrating from the already overvalued sector to those that are currently undervalued but are expected to be in demand in 2022.

From where the money started are typically the quarantine papers, the software companies already mentioned, and the vaccine developers on their way to the end of the epidemic.

And here landed the capital:

Consumer goods sector
P&G exchange rate

Coca-Cola exchange rate


Travel and transportation are also provided by oil companies.

Exxon Mobile exchange rate


The players of the banking sector serving the financial background of all this:

Citigroup árfolyam



With regard to bonds, it was already mentioned in the December Compass that the operation according to the previous textbook is now undergoing a change.
While previously government securities followed inflation and corporate bonds brought slightly above, this form of paper now seems to be overturned.
This is true both at home and globally.

In the picture you can see the yields of 10-year US government securities.

10-year US government bond yields

It may brighten your eyes that the bond market is finally coming to life a bit and yields are rising. Make no mistake, an increase in the yield on bonds means a drop in the price.

The declining exchange rate is due, among other things, to the fact that government bond yields are not currently keeping pace with inflation, so this must be achieved by other means.

In addition, yield curves in developed markets (and in Hungary as well) have become flatter. This means that the gap between the yields on shorter-term and longer-term bonds has narrowed. The reason for the current situation:

  • monetary tightening is likely due to high inflation, investors are looking for shorter-term bonds
  • a possible variant of the coronavirus makes investors risk averse


At home, both domestic and foreign policy factors affect the functioning of the economy.

Global processes

In the European Union, with the departure of Angela Merkel, a change of concept has come to the fore, as far as the Union’s eastern border is concerned. Previously, the EU was lenient with countries moving away from the democratic line (Hungary and Poland).
Although a new budget cycle has now begun in the EU, Hungary has relied heavily on this resource and is expected to continue to do so.

Hungary's balance in the EU budget
Source Hungary’s balance in the EU budget (Blue: income from the EU, Orange: National contribution)


If you take a good look at the picture, you can see that significantly more money is flowing into our country from the EU than we pay as a contribution. In 2020, we received an amount of 4.5% of GDP from the EU.

Now, however, precisely because we and the Poles are significantly exposed to European Union transfers, the rule of law mechanism is expected to be launched through the budget.
One noticeable sign of this is that payments of EU money are delaying. Several EU countries have already received support from the coronavirus recovery fund, amounting to 0.5% of their GDP for 1 year. This payment may be extended to Hungary until the summer.

Budget at the time of the elections

Elections are mostly characterized by election promises, and some of this has already begun. I mean things like:

  • Increasing the 13th monthly pension from 2 weeks to 1 month
  • law enforcement bonus brought forward from 2023
  • family tax refund
  • reduction of contributions (compensation for raising the minimum wage)
  • sectoral wage increases

These payments and revenue disbursements place a significant burden on the budget. As long as the budget deficit has been around 3% during the covid period, Márton Nagy, the prime minister’s chief economic policy adviser, estimates this at 16% for the six-month period from the end of 2021 to the beginning of 2022.

This significant budget deficit, combined with the delayed disbursement of EU money, could be a significant risk.

Activities of the central bank

The central bank, as the representative of monetary policy, is responsible, among other things, for maintaining the purchasing power of the forint, ie for keeping inflation in check and for supporting government (fiscal policy).

The effect of this in your life

  • at available yields
  • on inflation and
  • appears through borrowing rates.

Financing public debt

Distribution of government securities by investment sector
Distribution of government securities by investment sector (Source: State Audit Office)

Government securities embody debt in the same way as any other bond. This is nothing more than a loan to the state, that is, how much the state owes the person who buys the government security. If you look at the picture, you can see in yellow that roughly one-sixth of the government debt in 2020 was funded by the central bank.

Preserving the stability of the forint

The central bank is not in an easy position when it comes to maintaining the purchasing power of the forint. The already mentioned balance-seeking duality can also be observed here in Hungary. Due to the upcoming elections, fiscal policy would strengthen the economy, which in turn has a negative impact on inflation.

When it is necessary to protect the stability of the forint, the central bank can buy from its own reserves, and the demand and supply generated in this way can either keep the domestic currency stable or at least reduce exchange rate movements. If they cannot do this, a currency crisis like the Turkish lira could develop in Hungary. To avoid this, however, they need their own reserve.

The outstanding value in the picture was the result of the very weak forint. According to the report of the State Audit Office, the almost depleted reserve in 2017 can be traced back to several reasons, only one of which was the stronger forint. The significant weakening of the forint in 2020 also resulted in an outstanding value. From this you can see that the central bank is better off with a weaker forint in terms of reserves, even if it cannot supplement the effect of this from other sources.

MNB equalization reserve
MNB equalization reserve

The forint cannot be weakened indefinitely, so a significant increase in baserates was necessary and justified. As a result of this process, the forint has been moved from a historic low, so as you can see in the pictures, it has shown a significant strengthening against both the dollar and the euro.

Exchange rates of the forint and the euro

Exchange rates of the forint and the euro

Exchange rates of the forint and the dollar

Exchange rates of the forint and the dollar


The expected effect of this is that imported inflation will decrease. The most obvious impact on energy prices is likely. Although not immediately.
If this trend continues, the rate of inflation in Hungary may fall in the spring due to the expected decline in energy prices due to the expected decline in demand.

Yield curve

Here, too, a process called flattening the yield curve has emerged. In this process, long-term and short-term government bond yields are getting closer and closer.

Yield curve of Hungarian government securities

The reason for this is the same as I mentioned above:

  • investors seek security, boosting demand for shorter-term securities
  • the expected increase in central bank interest rates is also favorable for short-term government securities (you can read more about this in the article on the topic of duration)


Interest rate stop

What is the interest rate stop?

According to the government decree, the applicable reference interest rate is the applicable interest rate for certain mortgage loan agreements tied to a pre-determined reference interest rate. For these contracts, from 1 January 2022 to 30 June 2022, an earlier level (27 October 2021) is required to be used in calculating interest.

These credit products will be affected by the interest rate halt even if it is still in the moratorium.

What is the point of an interest rate stop?

For contracts where the interest period was turned between 27 October and 31 December 2021 (at which time the bank was recalculated at the current reference rate), the the reference rate shall not be higher than the rate in force on 27 October 2021. At this time, the bank, although set at a higher level, can only use the discount rate for the entire half-year period.

Where there is an interest rate turning date only after 1 January 2022 but before 30 June, the same shall apply to the period after the interest rate reversal.

It follows that in the case of a mortgage loan for which the interest rate stop is valid but there is no interest rate turning date between 27 October 2021 and 30.

Which products are affected?

The interest rate stop applies to floating-rate retail mortgages tied to a reference interest rate.

Such as:

  • market-rate mortgage loans with fixed interest rates (housing loan, free use) tied to BUBOR or other reference interest rates,
  • Contracts affected by a state interest subsidy for housing as defined by a government decree
  • Loans with market conditions are affected if the interest period is within 3 years and the effective date of the interest period is between 27 October 2021 and 30 June 2022.
Which products are not affected by the interest rate stop?
  • Mortgages with a fixed interest rate over 3 years, ie typically between 5 and 10 years or with a fixed maturity over the entire term. They are not affected even if it was now the turn of the interest period
  • in the case of contractual performance, interest-subsidized housing loans for families with several children (two government decrees were issued on this, one on 16/2016 and the other on 17/2016)
  • Non-mortgage loans (“Babaváró” loans, personal loans, overdrafts, etc.) are already rare to have variable interest rates.
  • Corporate loans.
The disadvantage of interest rate stop

While it sounds good that some action is needed because of rising interest rates, it doesn’t solve the real problem. I see this because:

  • The interest rate stop applies only to short-term loans, and thus does not encourage anyone to take action in line with current, rising interest rates (i.e., to choose a longer interest period, as “someone will help”).
  • It is not expected that the central bank will cut interest rates by the end of the half-year, so they will be affected by the interest rate increase there and then.
  • Short-term loans are typically cheaper than longer-term loans, so those who would be even more affected would be left out.

The Baby Waiting Loan (“Babaváró kölcsön”) will be taken out

By the end of 2022, this kind of loan, which can be used as deductible for many, will be phased out, and while it is conceivable, it is far from certain that there will be another. That is why, if you and your partner are thinking about buying a home and you want to use this as well, this year you still have the opportunity to do so. We can help you with this, contact us.

Rising lending rates

The central bank cools the economy directly by raising the central bank base rate. You can see the level of the base rate in the picture.

Central bank base rate

If you compare this with the benchmark interest rate on HUF loans, ie BUBOR, you can find similarities between the two.

Change in BUBOR

What does this mean for you if you want to take out a loan?

Do it as soon as possible as banks start pricing risks. Here, risk is the risk in any area, from the risk of rising interest rates to the fact that they will only bear the loss due to a stop in interest rates.

Rising base rates will also result in rising borrowing rates, meaning loans disbursed now will almost certainly be cheaper than those disbursed at the end of 2022. In this case, fixing your interest for a longer period of time can be a significant interest benefit for you.

What does this mean for you if you have existing credit?

If you haven’t already, fix your interest if possible. To do this, contact your lending bank to ask what to do and under what conditions they allow it. You will then exchange a loan with a shorter interest period for a longer period. That is, you fix your interest for the time you choose. This may involve start-up costs, or it may be better to think about switching to a different loan (refinance it, called redempting).

What you should then calculate is how much a fixed interest rate is expected to benefit you in a rising interest rate environment, and how much it will cost you.


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