The blue-chip WIG20 index has gained almost 14 percent over the last three months Courtesy of WBJ/Archives

Between the beginning of June and early September, the Warsaw Stock Exchange’s blue-chip WIG20 index gained nearly 17 percent, outdoing most major European indices. The overall WIG, meanwhile, rose by more than 18 percent over the same period.

WBJ spoke with leading banking analysts and fund managers to find out what was behind the recent gains. And, perhaps more importantly, to find out whether or not investors in Poland should remain bullish, or head for the hills.

M&A and hope

Not counting January, both the overall WIG and WIG20 took a hard hit earlier this year, with both indices shedding approximately 10 percent of their values. Construction stocks have seen the largest declines, with the broader WIG-DEWEL shedding 25 percent of its February values, following bankruptcy an-nouncements by firms struggling with the costs of Euro 2012 building projects. Worse, stocks within this sector are continuing to fall, and many analysts predict further declines.

Source: Money.pl

“One part of the reason that may explain increases on the overall WIG and WIG20 were a series of takeover bids and hostile acquisition attempts slightly before mid-2012,” said Pawel Cymcyk, analyst at ING TFI. One of the largest of these was in the chemical sector, with a series of tender offers for Azoty Tarnów made by Russian Acron. The share price of Azoty Tarnów has risen by over 20 percent since June, pushing up the broader WIG-CHEMIA index as well. Indeed the WIG-CHEMIA index has been one of the leaders among all sub-indices, gaining close to 15 percent.

Mr Cymcyk’s view was echoed by Krzysztof Mrówczyński, an analyst at Bank Pekao. “Prices of chemical stocks have been pumped up by all these tender offers in the last few months,” said Mr Mrówczyński. Synthos, which is listed on the WIG20 and is the largest chemical company on the WIG-CHEMIA index, has risen by around 5 percent since the beginning of June.

Another reason for the recent surge in stock prices, especially on the WIG20, can be attributed to a general “risk-on” sentiment. Trading long on hope has been an on-and-off theme in 2012, although in recent months there has been a general feeling of optimism.
“Support from [German Chancellor Angela] Merkel and ECB president Mario Draghi over this past summer has definitely lifted markets,” said Mr Cymcyk. He was quick, though, to explain that trading long on hope is precarious, and that the future of Greece in the short term is still uncertain.

In recent weeks, WSE indices have reacted positively to moves by European policymakers to quell the crisis, including the ECB’s announcement that it will launch an unlimited bond-buying program. Indeed, the WIG20 rose to its highest level since October 2011 on Friday of last week, growing 2.71 percent in a single day. The WIG20 rose 4.32 percent over the course of last week, while the WIG grew 3.73 percent.

Dreaming of dividends

Perhaps most important in explaining gains over the last few months are the huge sums paid out in dividends by the largest companies – many on the WIG20. Nearly 200 listed companies have paid out, or plan to pay out, dividends to shareholders. For the WIG20 alone, over zł.18 billion is expected to be returned to shareholders, up more than 30 percent from 2011. According to Łukasz Pałka, an analyst at financial portal Money.pl, one of the main reasons why companies are paying out record dividends is that they are expecting hard times. Firms prefer to share their profits rather than pursue investments in times of such uncertainty.

Politics has its say too. Of the 13 companies on the WIG20 that have paid out dividends so far in 2012, six are partially owned by the state and two have indirect government equity participation. And to meet budget inflows, the government has estimated that it will earn zł.8.5 billion from dividends this year, a figure that would beat the 2009 record, when zł.7.8 billion was collected. As Mr Pałka put it, “It is clear that the Polish government wants to take advantage of the fact that many companies are awash in cash, and do not necessarily want to pursue additional investments in the short run.”

For how long will the WIG and WIG20 keep rising? Tomasz Paczos/Fotonova

What’s next?

Market analysts across the board agree that restoring confidence in the euro zone is key to the direction in which markets will move in the upcoming months. With the situation in Greece still unclear and looming over Europe after two years, technical indicators and other market influences mean less in such an environment. Moreover, the Polish economy grew by a worse-than-expected 2.4 percent y/y in Q2 – the worst reading since Q3 of 2009, as the impact of the European debt crisis started to be felt in earnest.

“In such an environment of deteriorating conditions, on the backdrop of cheap stocks and large dividend payments, going long on stocks on the WIG20 is probably the best bet if one wants exposure to Polish equity,” said Mr Zatryb.

One sector that will surely be impacted negatively if hope fades further, though, is the banking sector. “Good times for banking are more or less over,” said Mr Zatryb. Since June, the WIG-BANKI index has seen a rise of almost 15 percent, but it is likely that the sector will see falls in the upcoming months.

Another sector that investors should be wary of is chemicals. In the words of Mr Mrówczyński, “generally, chemical companies (those producing basic chemicals) outperform other industries when there is an economic upturn, but when the economy slows down, their margins are under greater pressure than other industries.”

Source: Money.pl

So, despite recent surges on the WSE, the long-term outlook remains deeply uncertain. The reasons behind the increases are in many cases tenuous, with investors often banking on nothing more than hope, as well as a spree of dividend payouts that will come to an end sooner rather than later.

With the Polish economy starting to slow dramatically and the situation in the euro zone remaining dangerous, it is imperative for Polish stocks that the European crisis is brought under control. The ECB’s announcement that it will launch an unlimited bond-buying program has heartened investors, but a fresh round of bad news could quickly spell an end to the WSE’s latest surge.

Andrew Nawrocki & Iza Arciszewska