Portfolio specialist Dustin Blodgett correctly projected last year that Warsaw's stock exchange would be one of the best equity market bets in the world in 2017: he now says it should keep rising this year as well. Last year, among MSCI's country indexes, Poland came top among all emerging markets, rising 52.25 percent in dollar terms, with the zloty's firming accounting for 17 percent of that.
In comparison, emerging markets excluding China gained 28.3 percent and the United States itself some 19.5 percent. Analysts and fund managers reckon the Warsaw bourse can repeat at least some of this in 2018. Valuations remain low, economic fundamentals are supportive, and Warsaw's political battles with Brussels are mostly ignored by investors.
So Poland is again in the top five in value of the 34 countries ranked by Blodgett's company, California-based Accuvest Global Advisors. "Poland has great momentum leading into this year and still has cheap valuations," he said. "That could lead to another great year."
In its favour, Poland is the biggest of the European Union's fast-growing eastern emerging economies. The local exchange's turnover is also by far the highest in the region. The global stocks rally may lose momentum, but the Warsaw Stock Exchange is still expected to post strong gains, even though the zloty is unlikely to repeat last year's surge against the dollar.
"(A stock index) increase at the level of 10-12 percent is still possible," said Ryszard Rusak, Investment Director for Equities at Union Investment TFI in Warsaw. The median estimate in a Reuters survey of nine analysts projected a 7.6 percent zloty-denominated gain in the main index this year.
The market did not look a good bet when two years ago S&P downgraded Poland, blaming a weakened independence of key institutions under the government of the conservative PiS party. Last month the European Commission launched a process to suspend Poland's EU voting rights over its judicial reform which Brussels says is a threat to the rule of law. Hungary has pledged to block the procedure.
"Investors generally ignore political risks (in Central Europe)," said Viktor Szabo, senior investment manager at Aberdeen Investment Management. "Premiers come and go, policies do not change much, budgets do not blow up, and the region performs well." Indeed, rating agencies were most positive on Poland's outlook last year. Sectors including banks, which initially suffered under PiS rule, have improved their performance.
The currency helped. The zloty, along with the Czech crown, was the world's top-performing currency last year. Its gains versus the Swiss franc, in particular, reduced political pressure for a forced conversion of franc-denominated mortgage loans at the cost of banks.
The franc's earlier strength made those loans sour and weighed on the dividends and prospects of Polish banks. "It was a sword that hung over the banks," said Michal Sobolewski, analyst at DM BOS. With that problem fading, Warsaw-listed bank stocks have surged, igniting the bourse's rocket.
The Warsaw index of banks, which have almost 40 percent weight in the bourse's blue chip index have started 2018 with record highs. "After banks hit the bottom in their profitability in 2015-2016 due to a bank tax and interest rate cuts, they are now improving it," said Kamil Stolarski, analyst at Pekao IB.
The sector's net interest income rose by 12.5 percent in annual terms in the January-November period. Net fee income was up 9.6 percent. Margin's may rise if the central bank starts to raise its record low rates late this year or in 2019. "Banks are very cyclical," said Sobolewski. "These factors should have even stronger impact in 2018."
Banks in the region are expected to perform strongly. A labour shortage boosts wages and investments, while lending is booming. And while it is a deep-rooted view that the European Central Bank's monetary stimulus indirectly helped Central European asset prices, analysts said it was not a key factor.
"We don't believe that any (ECB) taper will hurt Poland or EM markets more than other markets, and instead rely on time tested principles to help us decide how to invest," said Blodgett. What really counts is valuations, he added. Poland still has a low price-to-book ratio of 1.38 and it has the lowest price-to-cash-earnings ratio at 5.6 among the 34 countries covered in Accuvest's model, compared with an average 10.7.
Comments
Comments are closed.