Hungarian stocks are trailing most of the world's markets this year as austerity measures slow the economy and anti-government protesters demonstrate in Budapest, Bloomberg reported.

That's set the stage for bargains, say Citigroup Inc. strategists and investor Zoltán Koch. „The stocks are cheap,” said Koch, who oversees the equivalent of $651 million in central and eastern European stocks at Raiffeisen Capital Management AG in Vienna. „We are still overweight in Hungarian stocks. It's time to accumulate.” He is attracted by the second-cheapest shares in Europe, the Middle East and Africa, after Russia. Stocks in Hungary's BUX Index sell in aggregate for 9.3 times earnings for the past year, versus 10.8 for a Morgan Stanley Capital International index of regional emerging markets.

Hungary's price-earnings ratio has averaged 11.4 over the past five years. The forint on March 19 rose to a record against the euro, indicating renewed confidence in Prime Minister Ferenc Gyurcsány. He has cut spending and raised taxes to reduce the European Union's widest budget deficit in hopes of qualifying to join the euro currency union. „Markets are taking Gyurcsány's commitment to fiscal reforms more seriously than they have in the past,” said Andrew Howell, an emerging-market strategist at Citigroup in New York.

Citigroup recommends investors in European, Middle Eastern and African emerging markets put 4.7% of their assets in Hungary. The country accounts for 3.7% of a regional index compiled by MSCI. The BUX will gain 15% to 20% by the end of the year from yesterday's close, he said. „The Hungarian market seems to be attractively valued,” said Howell. He recommends purchase of OTP Bank Nyrt, the country's biggest bank, and Magyar Telekom Nyrt, the former phone monopoly. Still, some investors say it's too soon to be bullish, given the prospect that political instability may weigh on the economy. Police used tear gas and water cannons on March 15, a national holiday, to disperse thousands of anti-government rioters who erected burning barricades along main thoroughfares in Budapest. There were more than 100 arrests.

Interest rates also may rise to combat inflation, which in February reached its highest in six years. Raiffeisen Capital's Koch says growth is „missing and inflation remains a risk.” „I don't think this is the right time to buy Hungarian shares,” said Dimitri Chatzoudis, who manages about $1.5 billion at ABN Amro Holding NV in Amsterdam. „There has to be more proof that there are no more macroeconomic risks.” Growth in the $123 billion economy will slow to 2.2% this year from 3.9% in 2006, the government estimates. Last year's expansion was the lowest in Eastern Europe. Growth will pick up to 2.6% in 2008, the government forecasts.

The austerity measures also have pushed down stocks. The BUX has dropped 6.7% this year, the second-biggest decline in Europe and the 10th-largest among 90 indexes tracked globally by Bloomberg. The measure had more than tripled in the previous five years, and a year ago was one of the world's best performers. Gedeon Richter Nyrt, Hungary's largest pharmaceutical company, has declined 16% this year as reduced government spending on health care and the increase in the forint, which reduces the value of international sales, hurt earnings. Magyar Telekom has fallen 10%, while OTP is 4.9% lower.

Gyurcsány has pushed through increases in the sales tax, cut subsidies for utility bills and lowered spending on road projects. The EU threatened October 10 to reduce aid if Hungary failed to bring the budget under control. The deficit last year equaled 9.6% of GDP, the largest in the 27-nation EU. Hungary, which joined the bloc in 2004, has missed its own deficit targets every year since 2001. Hungary won't be allowed to adopt the euro until the shortfall is down to 3% of GDP. Corporate profits have been hurt by the fiscal cutbacks as consumers spend less and taxes rise.

The worst of the political crisis may be past for the government. Gyurcsány withstood street protests in September and October after the prime minister admitted lying about the state of the economy during his election campaign earlier in the year. He rejected calls for his resignation from the opposition Fidesz party, and in October he survived a confidence vote in parliament, the only way to oust a prime minister. Investor Ralph Luther is buying. „Hungarian stocks are right now a very attractive opportunity,” said Luther, who manages $218 million at Berenberg Bank in Hamburg. He bought shares of Mol Nyrt, the country's largest oil company, two weeks ago, and shares of OTP Bank about a month ago. „The protests weren't that bad.