Sitting pretty – on the edge of a cliff

Analysts have been increasingly commenting on how the stock exchanges have somehow untethered themselves from the economic fundamentals: in the first half of the year the world had to face the impact of the pandemic, which became a story of lockdown and paralysis for key sectors of the economy; but falling interest rates and quantitative easing (central banks buying up government bonds), measures frequently used during the previous economic crisis, have actually resulted in more money flooding onto the market, which in turn has been invested in shares. This can be seen in both the higher turnover on the global stock exchanges (for example, on the WSE, where turnover went up by 34 pct in H1) and in the greater access to finance for equity funds. The fall in many indexes in April and March was made good on the trading floors and for some the ‘pandemic half-year’ ended in the black. That’s precisely what happened in the US, where the Nasdaq grew by 12 pct. The other main US index, the S&P, along with the German DAX, only lost a few percent over H1, which when taking into account the huge declines in April and March should still be regarded as something of an achievement. Whereas the real global economy in Q2 (at exactly the same time when stock exchanges across the world were booming) suffered the deepest downturn in a decade.

The US economy shrank by 33 pct in Q2. And even though the data was somewhat better than analysts had anticipated, the scale of the slump in the world’s largest economy has certainly made an impression. Compared to the previous quarter, economic activity fell by 5 pct in the US, which has already seen 5 mln coronavirus cases. As the virus continues to rage, this reduces the scope for how much the economy can bounce back – almost no one believes in a V-shaped recovery any more. The highly effective management of the pandemic and the huge sums made available to prop up industry did not prove to be enough, however, to prevent Europe’s largest economy, Germany, from shrinking. The 12 pct year-on-year shrinkage in Q2 was significantly worse than the single figure decline that analysts had been predicting and in fact was its worst performance for 50 years. The third quarter could see an improvement, providing there is no second wave of Covid-19 – but German GDP for 2020 is still set to decline despite this. The economic indicators in the euro zone in July were up by over 50 pct, both for industry and services, which should point to an economy that is expanding rather than shrinking. The question is whether this sudden bounce-back can be sustained and will still be reflected in future data; but economists seem less than certain about this and most are predicting a slow climb back up to the point where we were before the pandemic.

When it comes to the Polish economy, Q2 also saw reduced economic activity, but most economists estimate that this will be no greater than 10 pct. The economy sank to its lowest ebb in May, when industrial production shrank by a quarter year-on-year. The Warsaw stock exchange, however, was on the same trajectory as many bourses elsewhere, buoyed up by new investors (including private ones) and money from investment funds. Out of the indexes we are most concerned with, the WIG-Bud was the best performer, with a two-month rise of nearly 10 pct.

The market took the news of Budimex’s first half results rather well, which could be seen by the rise in its value, up by 8 pct y-o-y to PLN 3.38 bln, while its operating profit jumped by 34 pct to PLN 84 mln. The group has an impressive order book worth PLN 11.6 bln and even despite the economic slowdown has been able to win a number of new contracts. Investors have also been enamoured by the company’s liquidity – the almost PLN 2 bln it has in its kitty could be used as to cushion the expected slowdown in building construction.

The relatively good pandemic that Budimex has had so far has also been confirmed by the latest construction figures from Statistics Poland (GUS). Production continued at a healthy rate throughout the entire Polish construction sector (in contrast to the likes of Spain). This meant that the fall in sales revenues was far smaller than for industry as a whole, with the construction sector finishing H1 in the black year-on-year. But the real impact of the pandemic will only be felt in H2, as local authorities invest less and with the effect on residential and commercial construction still unknown. A quick bounce-back has already been clearly be seen in housing, but the picture is still muddy as it remains difficult to forecast how the banks, which are already more restrictive in their lending, will respond to the crisis. On the other hand, the reductions in interest rates (which bring down the cost of mortgages thus encouraging home buying as an investment), the lifting of travel restrictions and the continuing strength of the job market, have all combined to boost the sales of stock exchange listed residential developers. But the second quarter, most of which was spent locked down, turned out to be rather more challenging for the sector (sales plummeted by around 25 pct y-o-y, according to business journal ‘Parkiet’).

One company that has enjoyed a recent surge in value is Dom Development, which before the pandemic announced an extremely high dividend of PLN 9.5 per share for 2019. Shareholders would have received a total of around PLN 240 mln, but the payment was eventually suspended due to the pandemic. However, the payment is now back on for September, when, the company has announced, it will pay “the highest possible dividend” – a statement that has given a further boost to its share price.

Ups and then downs across the region

The Budapest stock exchange saw an even greater rise in turnover than the WSE in H1, growing by 40 pct over the period (a few points above the WSE’s 34 pct). The demand for shares in Bucharest and Zagreb also increased. But over the last two months the Prague index has fallen back by more than 3 pct, while the Hungarian BUX is down by almost 7 pct. The best performer in the region was the WIG 20, which over the last two months has lost just over 1 pct.