No fodder for bulls

The global economy is still doing well – the figures for the US have been keeping in line with projections based on positive consumer sentiment. This is reflected in the results of the financial publication season for Q1. Of the companies listed on the S&P500 index (which covers the widest range of industries), over three-quarters performed better than had been expected (in terms of profit and revenues). Giants such as Google and Amazon as well as smaller companies enjoyed improved results, thus supporting the economic data for Q1 (GDP in the US increased by 2.9 pct and a similar figure is expected for Q2 ). Clearly the uncertainty over the value of the dollar, the prospect of a trade war and the general geo-political situation have not conspired to deter traders from buying shares. Things have also been similar in Europe, where April in particular was quite a good month for the main indexes of the largest stock exchanges. But the situation for the real economy in across Europe does not seem so rosy, as confirmed by data indicating that a slowdown has been taking hold over the last few quarters. At the same time, the reasons to believe that the bad news (e.g. an outbreak of strike action) is just a series of isolated incidents along with the record-breaking production output of European economies give some reassurance that growth is set to continue – albeit more slowly. The spring weakening of the euro, which should help European exporters, and the slightly weaker condition of the economy have especially bolstered the view that interest rates will remain low, which is also helping the stock exchanges. Taking a look at the Q1 results, slower growth is obvious in Germany (2.3 pct y-o-y) where imports and exports are lower but investment is rising. Developing countries also grew slower: Romania had been the leader of the last few quarters, but its GDP growth rate has since fallen by 2 percentage points. Hungary and Poland have proved to be more resilient. GDP growth in Poland exceeded 5 pct in Q1 – higher than many analysts’ expectations and driven by the levels of consumption and investment remaining impressive. Economists agree that a slowdown is still on the cards, but apparently this will occur a little later than in the mid-year, as had been predicted earlier in 2018. The weak condition of the WSE may come as something of a surprise against this background, considering not only the state of more developed markets in the European region but also the emerging ones. After a weak April (especially compared to the European trading floors), May brought an improvement in sentiment, but the third week of the month was the worst on the WIG20 since February. The emerging markets are, on the one hand, not being helped by the increase in yields on US bonds (as their attractiveness grows), and so foreign capital has not been flowing onto the WSE; on the other, several factors have been preventing the Polish stock exchange from enjoying the increases abroad. These have included the collapse of major debt-collector GetBack, which has had an additional impact on the corporate bond market (which, for instance, developers like to raise capital from). As a result of this and other factors, the WIG and WIG20 have fallen by 2–3 pct. The WIG-Construction has performed even worse. It continued its gradual slump (amounting to 12 pct since the beginning of the year and by more than 30 pct over the last twelve months), confirming the ambivalent perception of the Polish construction sector (as the bedrock for growth in a economy boosted by EU funds, but hindered by labour market constraints). The WIG-Real Estate has been more resilient, but this is hardly surprising – after a fantastic 2017 traders have been holding onto their stakes in developers in the expectation of strong dividends. And examples of this have already been announced, by such developers as Atal, Dom Development, Echo and LC Corp (although there have also been exceptions, such as J.W. Construction, where the board has recommended keeping the profit in the company). At the same time, there have been more mutterings, from companies themselves and from analysts, that the development gold rush is slowly coming to an end and the next two years will not be so exhilarating for the sector, with margins of above 30 pct set to become a thing of the sepia-tinted past. Not everyone, however, is doing well at the moment – Polnord’s results for 2017 revealed a minimal profit and a low margin compared to the market in general. A number of individual events had an impact on this, but it has left Polnord some way behind the pack of those benefiting from the good times. Among the construction companies, Budimex closed Q1 with a slightly lower margin in the construction segment and with a 25 pct reduction in profit in annual terms. And although none of this changes the fact that the company remains a bright star in the construction firmament of the WSE, recommendations to sell its shares have become more frequent recently.

Down in the south

The resilience of the Hungarian economy to the slight deterioration of those in the more developed part of Europe has not been mirrored in the strength of its stock index. The situation on the BUX is similar to that of Poland, where the economic data has hardly been fuelling investors’ appetite for shares. The BUX was down by more than 5 pct over the month, although the WIG20 has lost more since the beginning of the year (8 pct vs. 7 pct). The PX50 in Prague also fell, but by 2 pct (however, it has gained almost 2 pct since the beginning of the year).