New Equity Indices for Hungary
Bryan Taylor, Chief Economist, Global Financial Data
One of the countries whose equity history has not been explored in detail is Austria-Hungary. Austria-Hungary is one of the few countries for which we have over 200 years of data for stocks, bonds and bills. The only countries with longer histories are the United Kingdom, France, and the United States.
The Vienna Stock Exchange has been in operation for over 250 years. Austria’s public debt began trading in Vienna in 1763, in Amsterdam in the 1780s and in London in 1795. Shares of the Austrian National Bank began trading in Vienna in 1816. Austrian railroads and banks traded on exchanges in Austria and Germany during the 1830s and by the 1870s, hundreds of shares traded on the Vienna Stock Exchange.
Before 1914, stocks from all areas of the Austria-Hungarian Empire traded in Vienna, but after World War I, the Austro-Hungarian Empire was broken up, and the regional exchanges in Prague and Budapest became the primary national exchanges for Czechoslovakia and Hungary. In 1948, the stock exchanges in Prague and Budapest were closed when the government nationalized major industries without compensating shareholders. The Vienna Stock Exchange remained open, but only in the 1990s did the Prague and Budapest exchanges reopen.
In 1913, Austria-Hungary represented about 3% of global market capitalization, but today, Austria represents only 0.10% of S&P’s Global Market Index of 50 countries and only 0.13% if you include Hungary and the Czech Republic. In 1913, the Austria-Hungarian Empire was one of the great powers of Europe, along with England, France, Germany and Russia. Vienna was a cultural center where Sigmund Freud, Guztav Klimt, Arnold Schoenberg and others contributed to the nation’s culture.
After World War I, however, Austria, Czechoslovakia and Hungary suffered dismemberment, absorption into Nazi Germany during World War II, and Communism in Czechoslovakia and Hungary after World War II. Today, 37 countries have stock markets whose capitalization exceeds Austria’s. The stock markets in Prague and Budapest are small and offer few opportunities for international investors. How well have the stock markets in Vienna, Prague and Budapest done over time?
The Austro-Hungarian Empire
Before World War I, the Austro-Hungarian Empire had one of the largest economies in Europe. The Empire included all of Austria, Hungary, the Czech Republic, Slovakia, Slovenia, Croatia and Bosnia & Herzegovina as well as parts of Poland, Ukraine, Romania, Serbia, Montenegro and Italy. It should be remembered that Austria stopped the Muslim invasion of Europe at the gates of Austria in 1529 and again in 1683.
Hungary was an independent country until the fifteenth century when Hungary reached its cultural and political height. After the Battle of Mohacs in 1526, Hungary was split between the Hapsburgs and the Ottoman Empire. The Congress of Vienna in 1815 established Austria as one of the four European powers along with England, France and Russia. A revolt against the Habsburgs in 1848 led to Russia intervening and helping to defeat the Hungarian rebels. The Hungarians continued their rebellion against Austria, and the Austro-Hungarian Compromise of 1867 created a dual monarchy with the two realms governed separately within the Empire. However, the empire was multi-ethnic and the different nationalities within the Austro-Hungarian Empire strived for independence.
Figure 1. The Austro-Hungarian Empire
Archduke Franz Ferdinand was assassinated in Sarajevo in 1914 which led to the onset of World War I. After Austria-Hungary’s defeat in World War I, the Austro-Hungarian empire was broken up under the Treaty of Saint Germain in 1919. This led to the creation of several new countries, Austria, Hungary, and Czechoslovakia, and the remaining parts of the Empire were allocated to Yugoslavia, Poland, Russia, Romania, Serbia and Italy according to their linguistic and cultural heritage.
Hungary was nationalistic and fiercely anti-communist after World War I. Hungary entered World War II as an Axis Power, but as the war turned against Germany, Hungary began negotiating with the Allies. Hungary was occupied by Germany in March 1944 and became a Nazi puppet state, but the Germans were driven out of Hungary by March 1945 and the country became a satellite of the Soviet Union. The Hungarian economy was devastated by the war and the Budapest Stock Exchange closed in 1948.
Austria and Hungarian Government Debt
The Vienna Stock Exchange was established in 1771 as a place where Austrian public debt could trade. Austrian debt was issued in Amsterdam, Vienna, London and other cities in Europe during the 1800s, and Austrian debt increased steadily between 1763 and 1913. Austria suffered inflation during the 1790s reducing the value of its banknotes to 15% of their face value. Austrian banknotes were devalued by 80%.
The Austrian National Bank (later the Austro-Hungarian National Bank) was created in 1816 and in 1817 the bank began issuing currency. Austria suffered through revolution in 1848 and 1849, suspended payments on its debt in 1849, suffered militarily during the Prussian-Austrian conflict of 1850 and the Crimean War of 1853 to 1856. Austria suffered defeat in the Austria-Prussian War in 1866, and faced rebellion from Hungary in 1867.
Figure 2. Yields on Austrian Government Bonds from 1788 to 2021
As a result of the Austro-Hungarian Compromise of 1867, Hungary began issuing its own bonds in 1868. Since Hungary had its own debt, separate from Austria’s, it was not responsible for the bonds issued by the Austrian government before World War I when the Austria-Hungary Empire was dissolved. Hungary suffered from hyperinflation between 1918 and 1924, and in 1931, Hungary defaulted on its foreign debt and remained in default until its debt was renegotiated in 1967. The 1946 hyperinflation, the worst in history, wiped out the value of all internal debt.
Figure 3. Hungarian External Bond Yields, 1872 to 1984
Hungary issued domestic currency bonds in 1997 and bond yields generally declined between 1997 and 2020, but have risen during the past two years. The yields on these bonds are illustrated in Figure 4. Hungary has generally enjoyed low inflation and a stable exchange rate leading to the declining yields on government bonds.
Figure 4. Hungarian 5-year Bond Yields, 1997 to 2022
National and Regional Exchanges
Most countries have seen a consolidation of regional exchanges into one national exchange. Today, national exchanges are merging into international exchanges such as Euronext. However, because of the fissiparous nature of Austria-Hungary, the opposite happened. Several regional exchanges were replaced by national exchanges. Prague became the primary stock exchange in Czechoslovakia and Budapest the primary stock exchange in Hungary.
Consequently, instead of calculating a single stock market index for Austria-Hungary, we must calculate four stock market indices, one for Austria-Hungary before the 1918, one for Austria, one for Hungary and one for Czechoslovakia. We can put together an index for Hungary by separating out the performance of Hungarian stocks on the Vienna stock exchange before 1914 and on the Budapest stock exchange after 1918. While shares from Hungary traded on the Vienna Stock Exchange before World War 1, some Hungarian shares only traded in Budapest. After the Empire was broken up, new shares were traded within their new national borders.
The Budapest Stock Exchange
The Budapest Stock and Commodity Exchange (BSCE) was founded in Pest on January 18, 1864. When it opened, 17 equities, 1 debenture, 11 foreign currencies and 9 bills of exchange were listed. No data are available for any Hungarian stocks that listed on the Vienna Stock Exchange before 1859. For the most part, Hungarian stocks performed similar to Austrian stocks before World War I. Investors did not differentiate between Austrian, Czech and Hungarian stocks since they were all freely traded in Vienna.
During the “Gruenderjahre” which occurred between 1870 and 1873, dozens of new companies came into existence in Austria-Hungary. The number of companies listed on the Vienna Stock exchange increased from 28 in 1866 to 378 in 1873 while the Vienna stock market capitalization rose from $230 million in 1866 to $748 million in 1873. Hungarian stocks lost about 50% of their value during the stock market crash of May 9, 1873. The relative performance of Hungarian, Czech and Austrian stocks is illustrated in Figure 6 which shows that Hungarian stocks outperformed Czech and Austrian stocks before World War I. However, at any point in time, stocks from each country participated in the same bull and bear markets that occurred in Austria-Hungary. Markets of Austria, Czechoslovakia and Hungary were clearly integrated.
Figure 6. Austria, Czech and Hungary Stock Market Indices, 1863 to 1918
The BSCE listed 310 securities by 1900 and over 500 by the beginning of World War I, though many securities did not trade on a regular basis. The stock exchange closed on July 27, 1914 and remained closed during the war. After the war, Austria-Hungary was broken up into three countries, Austria, Czechoslovakia and Hungary and parts of the empire were distributed to Poland, Russia, Romania, Serbia and Italy. Hungarian companies that had listed on the Vienna Stock Exchange moved to the Budapest Stock Exchange. Hungary suffered from hyperinflation which ended in 1924 causing declines in the real value of Hungarian stocks.
The pre-1945 Hungarian stock index is illustrated in Figure 7. The index has been converted into US Dollars to avoid the bias created by the inflation in the early 1920s. After peaking in the early 1880s, the market generally declined until 1920. The index remained stable during the 1920s and 1930s and made little upward progress.
The collapse of the Creditanstalt in 1931 led to a German banking moratorium and the closure of the Budapest Stock Exchange on July 14, 1931. The exchange reopened in September 1932. The BSCE remained open during World War II, and the stock market boomed as the profits of military industries rose. The stock market remained open until the siege of the city in December 1944 by Soviet forces. The BSCE reopened on August 1, 1946 after the hyperinflation ended and the forint replaced the pengo. The stock market rose for the rest of 1946, but declined until the closure of the exchange in March 1948 after major industry was nationalized by the Communist government without compensation to shareholders. Investors in both Hungary and Czechoslovakia suffered a total loss of their investment.
Figure 7. Budapest Stock Exchange Index in USD, 1859 to 1946
The Securities Act of 1989 led to the reopening of the Budapest Stock Exchange on January 1, 1991. Hungarian stocks have performed well compared to other former Eastern European countries. The BUX index is illustrated in Figure 8.
Figure 8. Budapest Stock Exchange Index, 1991 to 2022
Figure 9 provides a comparison of the returns to the Austrian, Czech and Hungarian Stock Exchanges over the past 25 years.
Figure 9. Austria, Hungary and Czech Stock Indices, 1994 to 2021
Returns to Hungarian Stocks
If you look at the Bull and Bear Markets in Hungary between 1859 and 1948, you will discover that several major bear markets occurred between 1859 and 1948. The market rose by 247% between 1859 and 1872, then declined by 44% to 1875. There was a 62.7% decline between 1881 and 1887, and a 68.8% decline between April 1927 and August 1934. In Hungarian Kronen, the stock market rose by 1,200,000% between 1887 and 1923, but this bull market was mainly driven by hyperinflation. If you measure the market in US Dollars, the market declined by 97.7% between 1911 and 1921.
A comparison of returns to stocks in Austria, Czechoslovakia and Hungary with returns in the United States, Germany and the United Kingdom is provided in Table 1. Hungarian stocks underperformed Austrian and Czech stocks before World War I, though the differences between returns was relatively small. Returns were comparable to those in Germany and in the United Kingdom, but much lower than returns in the United States. There were large differences in the returns between 1913 and 1944 with Austria providing large losses, Czechoslovakia breaking even and Hungary providing large gains, though primarily as a result of the boom in shares during World War II.
|
Austria |
Czech |
Hungary |
USA |
Germany |
UK |
|
|
1817-1914 |
6.8 |
7.05 |
4.78 |
|||
|
1836-1914 |
5.2 |
5.06 |
7.64 |
5.5 |
5.06 |
|
|
1863-1914 |
4.49 |
4.9 |
4.08 |
7.75 |
4.99 |
4.22 |
|
1913-1944 |
-5.63 |
0.02 |
5.39 |
8.3 |
7.73 |
6.04 |
|
1863-1944 |
0.64 |
3.13 |
4.95 |
8.04 |
6.81 |
5.02 |
|
1817-2021 |
4.85 |
8.99 |
6.32 |
6.86 |
Table 1. Annual Total Returns to stocks in Six countries, 1817 to 2021
Conclusion
You can break up the performance of Hungarian stocks into three periods. During the first period between 1859 and 1914, Hungarian stocks traded on the Vienna SE. When the Budapest SE was established in 1864, it acted as a regional stock exchange within the Austro-Hungarian economy. Smaller stocks traded in Budapest while larger companies traded in both Vienna and Budapest. During the second period, after World War I, the Budapest SE became the national stock exchange for Hungary. Hundreds of stocks were listed on the BSCE and traded until stocks were nationalized in 1948. No stock exchange existed in Hungary between 1948 and the reopening of the exchange in 1991. Today, the Budapest Stock Exchange is an active, if small, stock exchange.
Figure 10. Austrian, Czech and Hungarian Stocks as a Percentage of GDP, 1990 to 2022
Hungarian GDP is about $155 billion and the its market cap is about $31 billion. Because Hungary is small, it offers few opportunities for investment for foreigners. The market cap as a share of GDP of Austrian, Czech and Hungarian stocks is illustrated in Figure 10. Because of its small size and the need to establish itself as a market economy after the collapse of Communism, Hungary has been unable to establish any world class companies.
Data Sources
Data from Austria-Hungary was collected from several sources. The Compass, Kalender und Jahrbuch fuer Handel, Gewerbe und Industrie, provided data on stock prices, dividends and shares outstanding annually from 1868 until the 1970s. In addition to this, several newspapers were used including Die Freie Presse and Wiener Zeitung in Vienna. Once the data on stock prices, dividends, corporate actions and shares outstanding were collected, the GFD Indices for Austria, Czechoslovakia and Hungary as well as Austria-Hungary before World War I were calculated.
Bibliography
Emmerich Back, Die Aktien der Wiener Boerse, Vienna: 1931
Franz Baltzarek, Die Geschichte der Wiener Boerse, Vienna: Verlag Oesterrichischen Akademie der Wissenschaft, 1973
Compass, Kalender und Jahrbuch fuer Handel, Gewerbe und Industrie, Vienna, 1868 ff.
Rudolf Hanll, Aktien Compass der Wiener Boerse, 1924, Vienna: Compassverlag, 1924
Prager Boerse-Compass, 1929, Prague: Compassverlag, 1929
Emmerich Back, Die Aktien der Wiener Boerse, Vienna: Verlag Back, Steuermann & Co, 1931
Dr. Josef von Korosy, Die Finanziellen Ergebnisse der Actiengesellschaften Waerend des Letzten Vierteljahrhunderts (1874-1898), Berlin: Puttkammer und Muehlbrecht, 1901
Julius Michaelis, Deutschlands Eisenbahnen: Ein Handbuch fuer Geschaefsleute, Capitalisten und Speculanten, Leipzig: Amelangs Verlag, 1854, 1859 and 1863
Newspapers: Wiener Zeitung and Die Freie Presse
