To hell and back

The panic reached its climax on March 12th. As the coronavirus spread rapidly through Europe and the US, the world’s largest economies went into a lockdown for almost two months. With the retail and service sector forced to shut up shop, the cancellation of large events and people instructed to stay at home, economic activity ground to a halt. Many economic indicators hit new lows as the worst ever during a slowdown or a crunch, regardless of whether this was hard statistics or soft data, such as sentiment surveys. The bottom was well and truly hit – as reflected in the stock market indexes in mid-March, after which the hard slog back up could get underway, although at the time we were still in lockdown. Partly thanks to the rapid reaction of the central banks and the governmental promises of substantial aid (as well as investors taking advantage of the price reductions to snap up bargains), the stock markets picked up a little despite the dreadful figures. In April, at the height of the pandemic, the heartbeat of the global economy stopped almost completely, as the leading economic PMI indexes fell to their lowest level in history, both in individual countries and across the eurozone. In Poland the growth in industrial production shrank by 25 pct y-o-y. At the beginning of May, the leading economic indicators began to show a moderate improvement as the situation stabilised and governments felt able to slowly unfreeze their economies. The unemployment figures from the US turned out to be a real roller-coaster ride. At first they spiked with an unprecedented jump in April by 20 mln – from its lowest point in history to 20 pct
– only to fall back again in May to 13 pct with the creation of 2.5 mln new jobs. In Poland unemployment is forecast by both economists and the government to stay in single figures throughout 2020.

The stock markets recovered rapidly after the February-March meltdown, encouraged by the massive governmental aid programmes and the policies of central banks, slashing interest rates and flooding the market with money. Even in Poland
interest rates were cut to historic lows and are now in effect actually negative. They’ve been cut down to WIBOR-based debt servicing costs to those of servicing a residential mortgage, but is this likely
to encourage firms to invest and consumers to borrow against their apartments? To answer this question, we can only wait and see, because although the supply side of the economy has picked up, economists have yet to find out how consumers will behave over the coming months: Are they going to go on holiday? Will they begin home renovations? Or maybe they are going to have to start looking for work? This is why governments have been helping not just firms but also consumers – for example, in Germany VAT has been reduced and the government is contributing financially to each purchase of an electric vehicle.

As the pandemic continued to be brought under control, together with the introduction of economic stimuli and cheap money, early June saw the stock markets rise in both Poland and abroad, reaching levels of 30-40 pct above those of mid-March, when the capital markets were at their lowest ebb. However, the WSE is still at a much lower level than in mid-February.

The construction sector did surprisingly well on the WSE over the spring, as can be seen from the latest data. In March its index rose by almost 4 pct, before falling back in April to just under 1 pct (industrial production fell by 25 pct over the same period). But the growth rate for the last four months has turned out to be 6 pct higher than a year earlier. Unfortunately, many surveys and statements from those working in the sector suggest that the impact of the pandemic will have a delayed effect – as a result of the slump in economic activity, demand will shrink and order books are expected to be left empty. Budimex, which is the largest construction firm listed on the WSE, actually posted some solid results, with higher revenues and a slightly lower net profit. The company expects 2020 to be similar to last year, although its development business may suffer as a result of the pandemic. A number of construction companies, such as Torpol, posted better results than in 2019. On the other hand, there is Elektrobudowa, which filed for bankruptcy in March with a net loss resulting from write-downs of over PLN 300 mln.

The first quarter was quite a successful time for developers, since the pandemic restrictions were only imposed in the middle of March. The average margins for the residential segment remained at over 20 pct, while the leaders enjoyed figures even greater than 30 pct. But how different will the story be for Q2? The lockdown has dampened sales slightly and led to uncertainty about future sales. Even with the reduced interest rates lowering the cost of mortgages, there may actually be not enough of an incentive for home purchases, so developers could have to accept lower sales levels and limit their supply to protect their margins. For retail developers the impact of the pandemic has been even worse. The almost two-month closure of shopping centres has affected their ability to generate revenue and has raised questions over long term rent levels as well as possible changes in consumer habits. Shoppers might now lose the habit of visiting malls in favour of going online, where trade is booming.

On the subject of residential developers, it’s worth mentioning Polnord, which was taken over by Hungarian developer Cordia with its purchase of a 93 pct stake in the Polish company. It’s not yet known if Polnord will remain listed on the stock exchange or if it is to join the not inconsiderable number of companies that have left the trading floor. In the last three years more than 50 companies have left the WSE, while well-known names such as Indykpol and Orbis are also preparing to de-list this year.

In for the same ride

The stock exchanges elsewhere in the CEE region all followed the global trends closely. Between February 13th and June 9th, the BUX index in Hungary lost 15 pct, but since the low in March has risen by more than 20 pct. The PX50 in Prague suffered similar losses, but has since bounced back by more than 30 pct.