maxpolished-blog

[maxpolished-blog]

Mayans vs. Warsaw Stock Exchange. 2012 recap.

When you try to predict as to what’s going to happen on any stock exchange whatsoever,  you obviously look at the current macroeconomic situation, market sentiment, future expectations and so on. In addition to January usually being the odd one out month, there’ve recently been series of events that had the means to shape the market in the forthcoming months. Namely, the US fiscal cliff, ECB’s Draghi stance on interests rates (in the light of the so-called “currency war”), European Union agreeing on a budget, and last but not least – the end of the world. As the mentioned issues seem to be resolved resulting in a very awkward feeling of stabilization in the air, and to everybody’s astonishment – the Mayans apparently getting it wrong and thus allowing us to live a tad longer, one might as well carry on with the usual business of analyzing the current market situation to produce a highly probable forecast for the year at hand. Before just doing that it’s crucial however to take a look at 2012, because it may hold some additional clues as to what exactly is going on on the market and where it may be heading. I gathered some data on the WSE and put it all together so you could get a better picture of the Polish stock exchange. You can check my findings later down below.

First off, lets summarize what we’ve learned:

- all indices rose by more than 20%, but around 40% of the gains where courtesy of a end-of-the-year December bonanza  - turnover on the WSE fell sharply (most importantly stock and derivatives 24 & 40% respectively) - P/E (price to earnings) and P/BV (price to book value) ratios have been on the decline while the dividend yield has been rising  - although still lagging behind in IPO value to the biggest European stock markets, Polish IPO market wasn’t that bad in regards to both volume and value - 70% of the whole year IPOs value was attributed to one offering worth €511mn (biggest deal in 2011 was worth €1.44bn) - bonus chart: cost of borrowing fell in the whole European Union, in the Euro Area and – in particular – in Poland, with spreads between the three decreasing towards the end of the year.

So the Mayans were not entirely wrong after all. Something was brewing in December, they just didn’t hit the jackpot (or terribly underestimated Poland’s ability to resist ill fortune). The gain on the index itself is alright (esp. if you compare it to 2011) but the fact it was done with much lower turnover and big chunk of it in December, doesn’t exactly scream enthusiasm. The market is hesitant and investors themselves aren’t entirely sure what the future holds.  Although the lower level of P/E ratio might suggest that stock are undervalued and it is a good time to buy and in the consequence the market is poised to rise, as it turns out – the situation isn’t necessarily that colorful. An omnipresent issue is that companies have been recording lower margins on profits, courtesy of the global slowdown undoubtedly. Couple that with the fact that companies and analysts have been forced to lower, for some time now, future predictions of EPS (earnings per share), we arrive at lower P/E and forward P/E ratios. It’s also no secret that during times of uneasiness, investors tend to flock to shares paying out dividends, hence the higher dividend yield observed. Again, it doesn’t say anything definitive one way or the other, just strengthens the feeling of uncertainty on the stock exchange.  The state of the IPO market is more straightforward to explain. There’s a great risk, which many companies are unwilling to take, of going public when the market is so volatile. Costs of preparing and conducting an IPO (esp. on the main market) are still quite high, and a failure could deal a significant blow to a company’s finances. In addition to all the data regarding WSE, I put a chart of how exactly government bond yields had been changing in 2012, because there’s always correlation between the two. As you saw the costs of borrowing went down across the whole EU, noting biggest declines and reduction of spreads towards the end of the year, in December in particular (those Mayans again). That would indicate a renewed belief the worst part of the European recession is left behind and better times are at hand. In fact, the demand for Polish government bonds was so high, that Poland managed to satiate 40% of its borrowing needs for 2013 in January already. Given the knowledge of the inflation being held in check and expectations for interest rates to be cut (to stimulate growth), those could partly explain the higher demand. One other complementing explanation is that, while investors generally expect the macroeconomic situation and condition of companies to improve, they just aren’t willing to die for that belief (hence the lower turnover on the riskier stock exchange).   

Bartosz Grejner GLPartners.pl

[maxpolished-blog]

Is it polished yet?

There has been quite a lot going on in the global economy of late. With some (slightly) positive hints coming from all over that we (quite possibly) could forget about the crisis and brace ourselves for a frightening prospect of a better second half of the year, I thought it was a good moment to look at where exactly Poland stands, and where it’s headed.  I wouldn’t be overly joyful, rather cautiously optimistic. The fact is though, the data seems to point we are in for a rebound, or at least in the 12th round vs. recession: PMI indices are going up in the US, China and Europe (with a few notable exceptions, e.g. France – seems like always lagging behind), debt-overloaded trouble-stricken countries faring a tad better, banking activity picking up, bad debt becoming (somewhat) less of an issue, industry showing some signs of revival and so on. GDP growth has been in the central focus lately when annual readings started popping up. Poland’s economy grew in 2012 at a 2% rate, short of government (overly optimistic as usual) predictions by a couple of tenths, but quite in line with the market consensus. Is it a good sign, bad one or ...? As the stifled growth is connected to lower global demand, it’s best to compare it to countries in the Central and Eastern Europe and the Euro Area.

You can see that Polish GDP growth had been slightly less than of CEE countries pre-subprime crisis, and a bit faster compared the Euro Area (advance countries – no shocker). What’s most important is the fact that the following decline in growth wasn’t that steep than in both CEE and EA. The subsequent rise in turn wasn’t that fast but it only shows that Poland developed itself to be more resilient, less susceptible to negative macroeconomic environment, that it’s less risky than the countries in the region (it’s a fact that isn’t entirely reflected in the currency exchange rates: the level of risk of Polish Zloty is still mostly viewed as that of the whole region). Lower than in CEE countries, yet on the rise since 2006 and out of the target for some time, inflation rate is one of those things that can always hinder that modest growth. 

Looking more closely at the monthly rate instead of the annual one though, you can see it’s been steadily on the decline and set to fall in the inflation target range (2.5 +/- 1%), thus becoming less of an issue. In fact, in an attempt to give growth a little more ‘kick’ the National Bank of Poland recently lowered the interest rate three times in a row and is expected to make it four in February. That’s a definitely good course bearing also in mind the ongoing currency war and that a strong Zloty could hamper exports. For some time now there have been concerns regarding government debt and deficit though, namely they are both on a high level, above the average of CEE countries in similar growth phase (which is rising as well), and have been on the ‘run’ since the subprime debt crisis.

However, recent data suggest that the government debt and deficit could be poised to fall even lower in 2013; 2012q3 Eurostat readings show debt and deficit fall to 55.9% and 2.9% respectively, vs. 56.4% and 5% at the end of 2011 (some initial readings from the fourth quarter suggested even bigger decrease). That is no doubt the result of the ongoing fiscal consolidation but to put the debt firmly on a downward slope a stricter, multi-year expenditure planning is needed. Reforming the pension system is a priority if the government wishes to push down the deficit in the long run. It would be a milestone, it won’t come easy though, as the issue always sparkles much public debate, thus is politically difficult - it could backfire on the ruling party in the elections; they know it and fear it. The currently ruling party made some changes to the system (lowering the part transferred to pension funds) but only for the short term, appeasing the general public. Long run amendments are still to be introduced, one of them being changes in pension funds regulation – giving them more means and flexibility in investing.

One other topic which Poland never really has come to grips with, and which popped up recently, is the unemployment rate. 

It has been rising since 2008 and this year wasn’t any different. Both the Prime Minister and Vice Minister for Labour seem to agree that this year will be difficult for the labour market. As in other parts of Europe the industry sector will still be particularly vulnerable, as – in the case of Poland – will be the construction sector which has been struggling now for some time to get back on track from a major slump.  The situation may not look particularly bright at first glance but there’s a fair bet the unemployment rate will rise by just a few tenths in the worst case scenario and then start a steady (slow) downward path somewhere in mid-2013. A couple of factors may come into play. Firstly, as I noted earlier, the PMI readings in most countries have been on the rise lately, and not rarely exceeded expectations, sparking globally more orders and slowly rejuvenating all sectors as a whole. Secondly, the Economic sentiment increased in January in the entire EU. Confidence also improved in all sectors bar industry (slight decline) – although it improved in the Euro Area. Both sentiment and confidences indices reaffirm a (very) careful notion that most countries are slowly picking themselves up from recession. And thirdly -  Poland is heavily dependent on Germany in regard to export. Having most dealings with their closest neighbour, companies in the Western Poland got ‘hit’ the most by Germany’s lower orders (thus triggering layoffs). Bearing that in mind, one could expect the turn of the tide in this regard, considering that Germany has been recently upping its game, spearheaded by the industry sector. I have to stress the fact that numbers behind the recent increases are quite small and, assuming nothing out of the ordinary (no monkey business, in space mind you), it will take a couple of months to see some palpable effects in the Polish economy. Given the factors mentioned above, the unemployment rate curve in 2013 should be more or less the opposite of the one observed in 2012.

Declining unemployment rate should coincide with stabilizing and eventually halting the decrease in GDP growth, thus, third and fourth quarter could see growth picking up its pace yet again. Contrary to some countries, Poland didn’t cut its investments which could act as a leverage in coming out of recession.  Bartosz Grejner All mentioned economic data came either from Eurostad, IMF, World Bank or Central Statistic Office of Poland.