Back from a Long Journey Investment Barometer
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Back From a Long Journey Investment Barometer 19 November 2015 1 After many months of declines, October brought a long-awaited respite to investors in the stock market, with all major global indices ending the month well in the black. It could be said that we are back from a long journey because since the trough, the global index has managed to recover two-thirds of the ground previously lost. Last month, the best performers were the Japanese Topix (10.4% up) and the European Euro Stoxx 50 (10.2% up). The Hong Kong (8.6% up) and U.S. (8.3% up) stock markets also fared relatively well. This time, Warsaw Stock Exchange indices underperformed vis-à-vis their international peers, which resulted mostly from the investors’ uncertainty in the face of parliamentary elections. Among the emerging markets, Emerging Asia ones were the best performers (7.7% up) and the frontier markets proved the worst (3.6% up). In October, central bankers were again the focus of the markets’ 108 attention. While the Bank of Japan did not change its tone significantly, the ECB President’s statement was very dovish and contributed much to the upbeat mood in the markets. Mario 106 Draghi announced a December review of the QE program which was launched at the beginning of the year. The markets 104 interpreted this as a sign of a possible increase in, or extension of, the asset purchase scheme, and investors rushed to buy 102 stocks and bonds. Understandably, European indices turned out to be the largest beneficiaries of this optimism. 100 In the bond market, we have again observed drops in yields. U.S. 98 Treasuries proved the only exception here. High yield bonds have Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 had a very good month and are slowly regaining the ground lost since the beginning of the year. Polish Treasuries have also Polish bonds U.S. Bonds German bonds performed very well, especially those with longer maturities. Source: Bloomberg, Citi Handlowy In Poland, October was the month of waiting for election results. 125 The outcome was not wholly unexpected, and only the fact that 120 the winning party will be able to govern alone was something of a surprise for investors. In our opinion – and as we have already 115 repeatedly stated – this scenario might mean poor performance 110 of the blue chip segment. On the other hand, small and medium- 105 sized enterprises could benefit from those electoral promises that may increase household consumption in Poland. It appears that 100 in October, the investors started out with similar assumptions. 95 The largest companies included in the WIG20 blue chip index fell slightly while the smallest ones included in the sWIG80 one 90 gained nearly 4%. 85 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 We uphold our market outlook, seeing greater relative value in WIG30 S&P500 Eurostoxx50 shares, which should be supported by the good macroeconomic situation, an improvement in corporate earnings and the very Source: Bloomberg, Citi Handlowy loose monetary policy of central banks. As we have repeatedly stated, we consider the recent months’ declines to have been Karol Matczak merely a correction and we believe that there is a high probability of equity indices returning to trend growth. Investment Advisor Karol Ciuk We maintain our negative outlook on long-term bonds because Investment Advisor we do not see any scope for significant price rises in the medium Jakub Wojciechowski term. We are neutral on global high yield bonds and given the Securities Broker policy pursued by the ECB, we continue to see the greatest potential within this group in European corporate securities. We Contributing Authors: continue to overweight total return solutions. Bartłomiej Grelewicz Paweł Chylewski Dariusz Zalewski Maciej Pietraszkiewicz Tomasz Jachowicz Michał Wasilewski 2 3 Poland – waiting for the new government In October, politics once again dominated the Polish financial markets. As a result of the elections, the winning party has won a parliamentary majority, which on the one hand reduces the risk of political instability, but on the other may bring the fulfilment of costly election promises. Our outlook on the Polish market has not changed – we still prefer small and medium-sized companies to large ones, which attract more political risk. We continue to advise investors to limit their exposure to the debt market although we see the risk of a cut in interest rates in connection with the appointment of the new Monetary Policy Council. Just like in the past few months, in October the Polish financial market focused on the We still prefer small and medium-sized parliamentary elections and the associated companies to large ones, which attract opportunities and risks. 25 October has passed and we still have many questions but we already more political risk, and advise know that the Law and Justice (PiS) party was investors to limit their exposure to the triumphant, winning 37.6% of the vote. The Civic debt market. Platform (PO) won 24.1%, Kukiz’15 got 8.8% of the vote, the Modern (.Nowoczesna) party won 7.6% and the Polish People’s Party (PSL) – noticeable in the large and medium-sized 5.13%. This result guarantees the new company segments. It should be noted that recent government a parliamentary majority, averting the declines have been part of a much longer string of risk of lengthy coalition negotiations. disappointments with the Polish stock exchange Market reactions on the first day after the elections and particularly with the WIG20 blue chip index. reflected the investors’ considerable nervousness We already witnessed sharp declines in May when and indecision – the session started out deeply in the Law and Justice candidate led the first round the red to reverse all the losses and then some by of presidential elections and the threat of the end of the day. In the following days, the additional burden on the banking and energy sentiment deteriorated, which was particularly sectors became more real. Index performance in Poland year to date 120 115 110 105 100 95 Andrzej Duda wins the first round 90 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 WIG20 mWIG40 sWIG80 Source: Bloomberg, Citi Handlowy 4 Expenditures and funding sources suggested by Law and Justice 60 60 50 50 No funding Lowering specified retirement age 40 40 Reducing VAT fraud (realistically) Raising tax 30 30 Tax on large stores allowance 20 20 Bank tax PLN 500 per child 10 10 0 0 EXPENDITURES FUNDING SOURCES Source: Citi Handlowy In this issue of the Barometer, we will examine the amount that could actually be recovered there fundamental aspects in order to decide how the ranges from PLN 5 to 10 billion. The total boost in current political landscape may affect the budget receipts that could be realized by performance of the Polish economy and, implementing these ideas would therefore amount consequently, that of the stock and bond markets. to ca. PLN 18 billion. We are left with a gap of To this end, we should recall the promises made more than PLN 38 billion (see Chart above), which by the representatives of the victorious party raises the question about the probability of throughout the election campaign. electoral promises being fulfilled. Let us start with potential expenditure. Among Irrespective of the final shape of the legal flagship Law and Justice promises was the child amendments to be introduced, the direction in benefit in the amount of PLN 500 per month, to be which the policy of the new government is likely to paid for the second and each subsequent child. lead is clear. Strong fiscal expansion and According to estimates by its proponents, this potentially also monetary one (this will be would cost ca. PLN 22 billion per year. Raising the discussed in more detail further) is on the cards. If annual tax allowance to PLN 8,000 would mean we assume (in line with statements by similar outlays, i.e. ca. PLN 21.5 billion. Finally, representatives of the Law and Justice party) that reversing the increase in retirement age could the priority policy is the “PLN 500 per child” one, cost the budget PLN 14 billion in the next year and this would mean a significant transfer to this amount would continue to rise in subsequent households; according to estimates by our years. Summing up, the expenditure planned economists, such a transfer could accelerate GDP comes to ca. PLN 57.5 billion per year. How could growth by up to 1 percentage point as it would this amount be financed? There are several automatically boost consumption. potential sources – the bank tax is expected to However, the other side of the coin is the burden bring approximately PLN 5 billion. The tax on on those who would finance this benefit. The large stores could mean another PLN 3 billion. introduction of a bank tax has been our baseline However, the largest source of funding is also the scenario for a few months. We assume that part of most uncertain. The idea is to make the VAT the cost of this tax will be borne by customers and system more watertight, which is supposed to it appears that the current movements in share bring more than PLN 50 billion. However, the prices largely reflect the potential shift in the problem of the VAT gap is not new and according environment. Assistance for those who borrowed to estimates by economists and tax experts the 5 in Swiss francs remains the big unknown for now.