Tariff Risk Hangs Over East Europe’s Trump-Induced Market Rally

(Bloomberg) — Lauded as “tough” and “smart” by President Donald Trump, Hungary’s Viktor Orban is among the eastern European leaders hoping that allegiance to the US will translate into deals and economic gains. Instead, they may find their financial markets cannot escape the wider fallout of a US-Europe trade war.

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The region is a testing ground of sorts for the view that Trump’s good graces can buffer a country’s stock and currency markets in the face of turbulence elsewhere. Such hopes lifted Hungarian stocks to record highs immediately after Trump’s election win, while shares in Budapest-listed telecommunications firm 4iG Nyrt. soared after its chief executive accompanied the premier on his visit to Trump’s Mar-a-Lago mansion.

For now, the Trump effect still holds. Stocks across Eastern Europe are benefiting from the US president’s pledge to bring an end to Russia’s war in Ukraine, and those betting on upside for Hungary got an added boost Friday, as Orban touted a “sizable” US investment deal ahead.

Yet, with the European Union in the White House crosshairs for trade levies, market gains look precarious. Tariffs, which Trump says, will “definitely happen” could inflict a significant economic hit — a 10% levy will shave 0.5 percentage point off annual output, Deutsche Bank AG estimates. Targets could include cars and industrial goods which are often assembled in countries like Hungary and Slovakia.

The forint and the Czech koruna are among the emerging-market currencies most vulnerable to tariffs, Barclays strategists reckon.

“What matters for the region is whether there will be drastic tariff measures against Europe that could push the already weak European economy into recession,” said Tamas Cser, who helps manage the equivalent of about $2.5 billion at Hold Alapkezelo Zrt. in Budapest.

While Orban’s personal rapport with Trump could help him politically, “I don’t see how this would seriously set Hungary apart economically from the rest of the region,” said Cser, who is betting the Hungarian stocks rally will run out of steam.

Orban is not the only regional politician counting on a special relationship with Trump. Slovakia and Serbia have like-minded nationalist leaders, while upcoming elections could see Romania and the Czech Republic drift toward Trump. The US first family is also expanding business ties across the Balkans via a firm run by Trump’s son-in-law Jared Kushner.

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Politics are a clear worry for fund managers, with Hold’s Cser for instance, seeing the forint at risk from pre-election government spending. Most countries also have large budget deficits to plug, a tricky proposition should a wider trade war erupt.

What’s more, as the EU prepares a united front against a US tariff onslaught, bloc member Hungary will have limited room to leverage its Trump ties, according to Marcus Weyerer, an ETF strategist at Franklin Templeton Investment Management.

Hungary’s leadership “shares a similar political ideology with Trump. They get along very well and give each other compliments,” Weyerer said. “But, at the end of the day, Hungary is constrained within the EU framework. It’s unclear how Hungary can reap the benefits.”

A close relationship with the US leader could pay off for some emerging economies such as Turkey, India and Argentina, which are not constrained by EU membership rules. Indian Prime Minister Narendra Modi, for instance, has lowered some import tariffs to appease Trump before his trip to the US next week

Another beneficiary could be Ukraine. Its dollar bonds have rallied after Bloomberg reported the US will soon unveil a blueprint to end the war with Russia.

Meanwhile, within the EU, it’s Poland that’s emerged as an investor favorite, despite ousting a nationalist government in 2023 in favor of a pro-EU one. Hold’s Cser has added exposure to Warsaw shares, which have rallied 13% this year. The zloty is among this year’s top performing EM currencies.

One reason is that Poland’s political pivot has opened access to steady EU financial assistance, while much of Hungary’s disbursements have been frozen. Investors also note the US administration may look favorably on Warsaw’s strong defense spending.

“Despite any personal differences between the current Polish government and Trump, the two countries share common ground on several areas, including military cooperation,” said Nenad Dinic, a strategist at Bank Julius Baer.

What to Watch

• Investors will monitor rate decisions in Romania, Serbia, Peru and Uruguay

• The Munich Security Conference will keep the focus on Ukraine, with implications for bond investors there

• Inflation data are due in countries including the Czech Republic, Hungary and Poland

• Budget data in Hungary on Monday will show if the government is getting finances under control after overshoots; Premier Orban also hosts German far-right leader Alice Weidel during the week

–With assistance from Veronika Gulyas.

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