Putting open pension funds to bed

At the end of August, the Polish Central Statistical Office (GUS) confirmed previous estimates of Q2 economic growth of around 0.8 pct, adding to the conviction that the Polish economy had come out of a bad patch, even though poor investment and internal consumption figures are not pointing to a quick bounce. The fiscal situation seems to be getting increasingly difficult, which will probably have an impact on how companies listed on the Warsaw Stock Exchange are perceived. The growing budget deficit, and the lowering of the Fitch rating from ‘positive’ to ‘stable’ due to the suspension of security thresholds by the government designed to protect us against an increase in debt (this amounted to PLN 844 bln after July), and the projected deficit of almost PLN 50 bln for next year, have combined to create a worrying mix for investors. Their attention was, however, focused on the issue of open pension funds, which was resolved at the beginning of September. How is this going to shape the future of the WSE? Ambiguously, it would seem, because open pension funds can now become aggressive funds with a larger exposure to risk (since their bonds, which constituted a security buffer for open pension fund units, have been eliminated), and on the other hand the government has guaranteed maintaining the holdings of the funds (over PLN 110 bln in shares). It is somehow hard to imagine that the influx of such funds will not now fall (Poles who want to stay in open pension funds will have to submit a written statement to that effect), but on the other hand the investment limits and benchmarks that encouraged the funds act in herds and conservatively have been abolished. According to analysts there will be no major impact on the WSE over the next year or two. So what will happen next? Fewer funds mean a lower level of share purchases as well as public offerings that will be harder to carry out. Even though two days after the announcement of the government’s plans there was a panicky sell-off on the WSE, the second week of September saw the return of a measure of calm. The balance of the four weeks was still slightly in the red – the WIG20 lost 3 pct, and the WIG just over 1 pct. The sector sub-indexes behaved differently than those for the broader market – WIG-Construction was the leader of our mini-ranking, rising by just over 1 pct, whereas WIG-Developers turned out to be the weakest, down by as much as 5 pct. Among developers it is difficult to pick out a company that stood out in any way. It is also hard to put Gant into this context, the shares of which were twice as expensive only three months ago, Since the beginning of the year the company has lost over 50 pct of its value. Finding itself in a tricky situation, Gant announced an earlier redemption of its bonds and cancelled its planned share issue. Both items of news were positively viewed by investors, even though its H1 results were weak – the company suffered a 68 pct decrease in revenue and increased its net loss to PLN 30 mln from PLN 6 mln a year ago. Dom Development had slightly weaker data in H1 (a PLN 27 mln profit, down from PLN 30 mln), as did Ronson and Robyg (a profit of app. PLN 13 mln in both cases), but there were some companies that could show a clear improvement – such as LC Corp and Marvipol. Among the commercial developers,
GTC had surprisingly negative results – a loss of EUR 42 mln compared to an expected loss of app. EUR 6 mln. The company is putting the result down to the weak macroeconomic condition of the markets it operates in (Central and Southern Europe). Echo Investment was able to show itself in a completely different light – its H1 profit came to PLN 302 mln, three times as much as in the first half of 2012. In the construction sector, Budimex’s shares have risen in value and are now priced at their highest level in nearly 2.5 years. But other major players in the industry are still struggling. PBG wants its creditors to acquire shares in the company, which would result in Jerzy Wiśniewski relinquishing control, diluting his shares in the company to just over 20 pct, with the creditors acquiring a 75 pct holding. Polimex also had news for investors, publishing its strategy for the period up until 2019. This predicts a net profit in 2015 with the repayment of its debt over the next six years, as well as a pull-out from the road construction segment in favour of industrial construction and a further “restructuring” of its workforce.

Budapest goes up, Prague goes down
The Budapest bourse was the strongest index in Central and Eastern Europe, increasingly slightly in the last few weeks by 1 pct. The stock exchange in Prague shrank back slightly – by a quarter of a percentage point. The mood on the trading floors in the two capitals was mainly influenced by international factors – the uncertainty surrounding the situation in Syria and the behaviour of the leading stock exchanges. The economies of Central Europe, which are tightly connected and focused on exports, are also now seeing an opportunity to help in the rebuilding of the eurozone economy, even though its growth pace is only symbolic at this stage (0.3 pct in Q2, q-o-q).