Customarily,
December on financial markets is hardly ever a season of bloodshed. Either
everyone is celebrating, trading volumes are thin and markets are placid or
fund managers are make use of shallow market to boost portfolio valuations before
year-end. This year Santa Claus rally, if it is witnessed at all, will be at
best considered a revival after the recent turbulent weeks.
The most
frequently benchmark used for the Polish stock market its is large-cap index,
WIG20, composed of twenty biggest, in terms of the market value, publicly
traded companies in Poland. The index, with its historical high of more than
3,900 points recorded in October 2007 and this decade’s high of more than 2,900
in April 2011, has seen a few months of dreadful performance. In early May this
year WIG20 peaked at 2,558 points, while on F11 December’s market close it
dropped to mere 1,757 points, so it declined by 31% over 7 months. Raw numbers
in theory should not bear a false testimony, yet what underlies the numbers
might be biased enough to prompt market data recipients to jump to conclusions.
So before
we do this, three facts:
- as of 11
December 2015’s close, WIG20 components accounted for 27.6% of the whole stock
market in Poland, in terms of market capitalisation,
- the index
is dominated by two industries: financial sector (Alior Bank, Bank Zachodni
WBK, mBank, Pekao S.A., PKO BP, PZU) and energy (Enea, Energa, PGE, Tauron),
- the index
is a price index, i.e. takes into account only price movements, but fails to
account for return from dividends, while the yield of the index in the long-run
is close to risk-free return or slightly higher.
The first
arguments persuades you to think of another, more representative benchmark for
the Polish stock market, the second should tell you performance of two
industries might substantially affect performance of the index.
And indeed,
the shares of banks and the insurer have been falling for the recent months, as
valuations discounted imposition of financial sector tax, higher bank guarantee
fund contributions as well as anticipated, yet for a while put back, conversion
of FX-denominated loans unfavourable for banks.
Shares of
energy producers plummeted because of their planned involvement in the bail-out
of coal mining, extensive CAPEX needs, both factors trimming down their
dividend payout capacity.
Shares of
banks dropped by 30% since May 2015, shares of utilities declined by 40% since
May 2015. Besides, two vital components of the index are KGHM, punched by
falling copper and silver prices (not well offset by stronger USD) and
Bogdanka, thumped by falling hard coal prices. No wonder then even if other 8
companies perform decently (difficult, if the market is perceived as homogenous
by foreign investors), the index could not fare well…
The better
representative of the broader market is WIG. While WIG20 retracted to levels
last seen in April 2009, during post-crisis rally, WIG, a total-return index
(takes into account dividend income), is two times higher than in February
2009, but fell by 23% from its peak in May 2015, meaning the Warsaw Stock
Exchange has officially entered the bear market.
A justified
question is whether the factors depressing Polish equities are of local or
global nature. If you look at performance of S&P 500, no pattern similar to
what has observed in Poland can be discerned.
The same if
you peek at DAX30. Both Wall Street and Frankfurt contracted at the news of
faltering Chinese economy, but both are still in bull market.
If the
stock exchange predicts troubles in the future, it begins to do when the
troubles emerge on the horizon and they did so in May 2015, when lots of market
participants realised PO was bound to lose the parliamentary election and PiS,
as they got hold of power, would tamper with the economy. Policies pursued by
PO were also to blame, as they also had put forward a draft of FX-denominated
mortgages conversion and they set off to exploit energy companies to rescue
insolvent coal mines.
With
hindsight I am grateful to the New Factory for imposing stringent trading
restrictions on me which have put me off trading and prompted to terminate my
brokerage account. Had the limitations not been in place, I would have several
times attempted to catch the falling knife. With hindsight, I see I would have
been worse off.
Moving away
from Poland… Prices of Brent Oil (traded in London), after bottoming out early
this year, have been falling since early summer, but recently they tumbled,
best evidenced by the 9% drop within the last week. Excess of oil supply is
likely to persist, extraction is unlikely to be cut down by OPEC members, while
macroeconomic environment remains shaky. All these factors combined ward off
the scenario of crude oil prices drifting to where they were before November 2014.
And a quick
glance at the copper. Quotations of the commodity have been in the downward
trend for nearly five years and had a tremendous impact on market price of KGHM
shares (in early 2013 it trade above 190 PLN per share, today mere 61 PLN would
buy such security). Now the Polish copper behemoth is nearing the verge of
breaking even, while the promises of lifting the copper tax, made by PiS ahead
of the election, are up in the air.
The Polish
currency, at least in comparison with our stock market, is holding up
relatively well. EUR/PLN pair, as dull as ditchwater over the last three years,
has climbed towards 4.40 and forges ahead to break out from the range within
which it stayed for too long.
USD/PLN,
far more volatile than EUR/PLN, began its ascent in 3Q2014 and in early
December 2015 crossed the level of 4.00. It deserves to be stressed however,
that the driver of the incline is on the USD side of the pair. The American
currency is sent up by buoyant US economy, dwindling commodity prices (negative
correlation) and expected interest rate hike (FED meeting due in the coming
week).
Unfortunately,
I am not a future-teller and even if I were, I would not dare to advise you how
to reap profits from what is happening on the markets. Given high expenditures
in the offing, I am keeping all my savings at banks. But even with longer
investment horizon, I would not bet on stock market recovery. Fundamentally the
Polish economy is holding strong, but the extent to which it can be spoilt by
zipperheads behind the wheel is unknown. By analogy, in first half of 2008
everyone thought given good economic situation, the bear market should have
drawn to a close and stock valuations were bound for correction. Over the next
months they fell by some 50%. What I am rather confident is that if WIG slides
into 30,000 points (I doubt this is probable), equity valuations will be
attractive in long-term perspective.
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