June 7, 2017    4 minute read

Warsaw Stock Exchange: A Pillar Of Strength

Can the Good Times Last?    June 7, 2017    4 minute read

Warsaw Stock Exchange: A Pillar Of Strength

In 2017, the indices of the Warsaw Stock Exchange (WSE) have outperformed other European markets. It is the result of a whole array of economic, political, financial and psychological factors.

From the beginning of the year to the end of May, the WIG20 index, which groups the most liquid companies of the WSE, rose by almost 18%. Meanwhile, the WIG, the broad market index, rose by 16.6 percent.

Background

On the Warsaw Stock Exchange, there are 483 listed companies whose total value (capitalization) amounts to PLN970bn, which is half of Poland’s GDP.

Among the ten most valuable companies, half are banks.  Other sectors include energy, resources, and media. Many of them shot up significantly this year, leaving behind European counterparts.

The current strength of the Polish market can be proved by the fact that the largest ETF with exposure to this market (the iShares MSCI Poland Capped ETF) has just joined the IBD ETF Leaders list.

This is an exclusive group of funds that are characterised, among other things, by high return rates, high relative strength, strong upward trend. Funds are selected by a specially constructed algorithm out of thousands of entities.

The Warsaw Stock Exchange is flourishing after a very unfortunate period. From the end of April 2015 to the end of October 2016, the WIG20 dived by more than 33%. How has the situation with the Warsaw Stock Exchange so radically reversed?

Catalysts

In short, the business world believes in Trump, and Le Pen did not win the French election. If US investors are optimistic, this translates into improved valuations of Polish companies.

For the Warsaw Stock Exchange, business cyclicality is also very important. The global economy is reaching momentum, so raw material prices are rising.

Meanwhile, among the few largest companies on the WSE, are the copper producer, KGHM, and the coal extractor, JSW.

Rising Interest in Emerging Markets

From the beginning of 2016, there has been an upward trend in global emerging markets, which has helped the Polish stock market.

Foreign investors are investing in markets such as Brazil, Turkey, and Russia, which are far riskier than the Polish market. Nevertheless, Poland was extremely underrepresented in the foreign portfolios.

There has been a clear improvement in the economic situation in Poland. The dynamics of industrial production, retail sales and core inflation are increasing, whereas the labor market is getting stronger.

EU funds are starting to flow in after a hiatus. Moreover, the PMI indices suggest that there is a good chance of further improvement of the macroeconomic landscape in Poland, also due to the economic revival in Europe.

The government’s social policy also supports consumption, which is important. Additionally, this year’s budget results are also surprisingly good, due to increased tax revenues and improved VAT collection.

The situation on the WSE is supported by a mild monetary policy. The main interest rate is still maintained by the central bank at a record low level despite inflation rising.

A continuing bull trend in the Polish market is a very likely scenario. Attractive economic prospects, relatively low valuations and global sentiment should favor Polish companies.

The Polish Economy

The Polish economy is on a path of sustainable growth, which is reflected in almost a zero demand gap and a low current account balance.

In the future, it is expected that the dynamics of growth will accelerate in excess of the growth rate of the national potential. Forecasts suggest that the demand gap from 2017 will be slightly positive, showing the aggregate market for goods and services in the coming years will be in a state of near-equilibrium.

The total current and capital account balance, which takes into account all EU transfers and allows for an assessment of the external balance, looks positive.

Positive changes in the current and capital account balance are accompanied by lower inflows of foreign investment and larger Polish investments abroad.

As a consequence, Poland’s negative net international investment position relative to GDP between 2015 and 2016 has improved. One can expect a continuation of this trend.

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