Trade… war! What is it good for?

At the end of April it might have seemed as though the bull market on the global stock exchanges was going to keep going indefinitely. The indexes across the ocean were hitting historical highs despite the continuing tensions between China and the US. The performances of the European stock exchanges were hardly giving grounds for concern either, even though the data for the EU economies was less than encouraging. Only the trading floors in Asia were seeing falls big enough to disturb the moods in the emerging markets. But the actual shock to the system came later in the month. Unexpectedly, the trade war between the US and China worsened instead of weakening. Donald Trump increased tariffs on selected Chinese goods to as much as even 25 pct, prompting a sharp sell-off on the American stock exchanges. The emerging markets, for which this May will probably be the worst in seven years, also reacted adversely. The Chinese economy might lose up to 1 percentage point of its GDP growth, which could mean that 2019 would be the worst year for the country’s economy in the last 30 years. The dispute between Chinese smartphone-producing giant Huawei and the US authorities has become symptomatic of the tensions between the two economic giants. In this context, the large declines the indices of the broader market in Warsaw suffered came as little surprise. The construction and real estate sub-indices also lost ground, but performed slightly better in comparison to the others. The situation looks even better when compared to the beginning of the year – even though both main indexes are now in the red, WIG-Construction still managed to remain higher than on January 1st while WIG-Real Estate has been the second best index in terms of increases.

The indicators for the construction sector all show dramatic growth, with construction and assembly production, as reported by the Polish Central Statistical Office [GUS], increasing by 9 pct in Q1 with increases in each segment. Unfortunately, the margins of the construction business remain an issue – this in turn is leading to liquidity problems for many smaller construction companies (according to the BIG Info Monitor report, the number of firms unable to settle their liabilities on time increased by around 20 pct in 2018). Although no one expects the construction market to collapse (as constructors are currently looking to select just those projects that would give them high enough margins rather than simply to increase their portfolios), the sector does face challenges in the form of transitioning from one EU budget window to the next. The transitions that took place in the last two windows resulted in an accumulation of projects and a boom on the materials market as well as increased labour costs. Such issues are also evident in the performances of individual companies – Polimex-Mostostal’s figures went into the red in Q1, while Erbud’s results confirmed the problems the sector presently has with margins. Erbud recorded revenues almost 40 pct up y-o-y and although its operating profit was 17 pct higher than a year earlier, its profitability dropped below 1 pct. Elektrobudowa’s problems resulting from the delayed completion of a project for Orlen were also reflected in its results (a PLN 72 mln loss in 2018) and in its share price.

The real boom has undoubtedly been taking place in the development segment, whose players have been unable to conceal their optimism as the prospects for their businesses and further projects continue to blossom. The higher construction costs have been impacting margins, but they still remain at very attractive levels (more than 20 pct in the best cases for this segment) – and this has been encouraging investment, such as in land banks. Archicom, which has a stock value of app. PLN 350 mln, is to allocate PLN 100 mln for land purchases in 2019 alone. Dom Development has also been thriving and is now one of the brightest stars among developers on the stock exchange. Its high profit level in 2018 has prompted it to announce a huge dividend (PLN 9.05), while the company is confident that this year will be even better as it is already reaping the benefits of setting up its own general contractor. Atal, which enjoyed some very promising sales results in January–April, also has its own contractor. The company’s apartment sales have grown by 18 pct y-o-y. But it is not only residential developers that are doing well. GTC registered higher revenues and operating profit in Q1, which the company attributes to the continuing high demand for office space across the CEE and SEE regions. (Mir)

Wave of destruction

In our region, the sudden deterioration in China-US trade relations hit Warsaw the hardest, with the WIG20 index losing 7.2 pct since the beginning of May while the BUX in Budapest lost 6.5 pct. In comparison with other emerging markets, however, the Polish stock market did turn out to be more resilient than those in Indonesia and Turkey, but was weaker than the indexes in Brazil and Korea. Against this background, the much smaller Prague stock market was clearly the best performer, losing just over 2 pct.