Correction time

Even though Covid-19 shows no signs of abating and the number of cases continues to rise across the world, no one is talking any more about lockdowns or shutting down the economy. Slamming the brakes on economic activity – from production and retail through to services – prompted a crash unprecedented in the history of GDP statistics. Comparisons have even been made to the devastation left in the wake of the Second World War. The eurozone economy shrank by 12 pct, with huge differences between individual countries. The German economy slumped 10 pct, but in Spain the figure was closer to 20 pct. The Japanese economy suffered a 28 pct contraction, while for Thailand, Malaysia and Singapore the shrinkage was between 10 pct and 20 pct. The US economy, however, plummeted by 32 pct – but it should be noted that this is according to annualised data, which indicates what the figure would be if Q2 trends were to continue. In most countries, a bounce-back has clearly been evident following the economic restart. The huge fiscal aid programmes (such as tax reductions and temporary benefits and allowances) have been having an effect, and for richer countries such as Germany they are set to continue into 2021, but at a cost of several billion euros.

As for Poland, its year-on-year GDP contraction amounted to just under 9 pct. But in spite of how much post-lockdown consumption has bounced back since June, economists are still concerned about the current investment situation. In the spring, the relative health of the construction output figures stood out starkly against the background of the alarming crash in the data for industrial production, but by the summer the situation had actually been reversed. Year-on-year growth was being recorded for industry, but the construction figures started to slide downwards – in July they fell by 11 pct y-o-y, more than twice as much as economists had forecast. When the figures are broken down it turns out that engineering work (large infrastructure projects) was the hardest hit by the slowdown but that work on the construction of buildings also slowed. This resulted from the suspensions of such investments, with some projects being abandoned altogether.

The stock exchanges, which since bottoming out in March had regained several dozen percentage points – and in the US had even recorded a historic high – began to fall back to a level more on a par with the economic reality. Across the ocean there were clear signals of an impending correction, and so the WIG20 sank to its lowest point since June. Following its previous high, the index of Poland’s largest companies fell by 4.5 pct in five weeks, while the wider market index slid back by almost 4 pct. The construction sub-index came in even worse with losses of over 5 pct, but the residential developer index was able to remain stable. Since the beginning of the year only the WIG-Bud has risen, which might come as some surprise because it was the residential developer segment that had appeared to be the most resilient to the pandemic-induced turmoil. As reflected, for example, in statements made by Dom Development’s CEO in an interview with ‘Parkiet’ entitled ‘Pandemic? What pandemic?’. In the first half of the year the developer’s revenues and profits rose and it actually declared that demand had recovered following the lockdown. Those companies that have exposure to the hospitality market suffered weaker results – Warimpex saw its hotel revenues slump by 92 pct in Q2, while JW Construction’s revenues from this segment fell by 85 pct, with the latter recording an overall net loss and fall in revenues of 60 pct. In its commentary on the results, JW’s management attributed this to the scale of its operations, having constructed 5,500 units in 19 projects – and this is going to significantly influence its performance over the next few years. In September it turned out that its largest shareholder, Janusz Wojciechowski, has raised his stake to 90 pct. However, he is not about to de-list the company from the WSE, because the conditions for issuing bonds won’t allow this.

Despite the pandemic, bonds remain the tool of choice for developers looking to raise capital for e.g. new projects. Atal has recently raised PLN 150 mln in this way and Dom Development is also preparing such a move. Big players can still rely on demand from institutional investors – there’s still ample capital on the market waiting to be invested, held by the likes of investment funds. Smaller players are also finding that issuing bonds to individual investors is still an effective course to take. The only thing the pandemic seems to have changed is the price – to raise capital in this way a company now has to pay a little more.

Construction firms have also published their H1 figures. Erbud recorded slightly lower revenues and profit, although the group insists that its prospects – as a result of having diversified its activities – are not bad. The demand for construction services from developers has also recovered, as smaller companies such as Unibep have also reported. While those that specialise in infrastructure projects recorded a temporary fall in the value of their order books, but this is more due to the delayed effect of the economic slowdown and also a result of the transition period between different EU budgets – since it’s the EU that continues to drive the demand for road construction and rail upgrades in Poland. (Mir)

WSE trumps the PSE and BSE

Although the pandemic has had a relatively mild impact on CEE economies, the stock exchanges of the region have still been led by the global trends. The Hungarian BUX lost 6.5 pct in five weeks and the Prague PX50 fell by almost 4 pct. Both indices fared worse than the WIG 20 and both also had worse rates of return than at the beginning of the year, having lost 26 pct and 22 pct respectively since then (the Warsaw index is down by 20 pct).