Warsaw bullish after the elections

Share investors are still waiting for clear signs from the US Federal Reserve over whether it is going to raise interest rates, particularly after the publication of strong data for the US economy, which currently has better prospects than the eurozone. In Q3, the US economy grew much quicker than economists had been expecting (5 pct q-o-q – more than twice as fast as the previous quarter), and this was mainly due to consumer spending, although foreign investment also bolstered the figures. At the same time, inflation has remained under control, which showed that the high interest rates have not hurt consumer spending while bringing rising prices back down to a manageable level. Across the entire US, prices have been going up by as much as 2.2 pct, which is quicker than in 2022, but clearly slower than in 2021, when the inflation rate was close to 6 pct. Although the economy is gradually coming down from its high, a slowdown could still happen in 2024, the prospect of which has been deterring the Fed from raising interest rates any further. The optimistic data from the US contrasts sharply with the sluggish state of the eurozone. The zero to minimal growth over the previous quarters turned into a slight fall in GDP (0.1 pct q-o-q) between July and September. In the best cases, its largest economies are only just managing to maintain growth similar to the previous quarter. The only good news is the falling rate of inflation (to around 3 pct in the eurozone). The German economy, which according to forecasts will have contracted by a few dozen percentage points over 2023, has been suffering from a major collapse in its industrial sector, with production levels having plunged to similar levels as those during the pandemic, with the automotive sector and energy-intensive industries having been hit the worst. The announcement that there will be no interest rate rises for the eurozone failed to improve the mood, with the indexes in Paris and London slumping to their lowest levels of the last twelve months.

Meanwhile, in Poland the indices uncharacteristically outperformed the global indicators. This wasn’t, however, mainly being driven the economic figures (which actually show that the economy is probably bottoming out), but was more to do with the results of the parliamentary elections in the middle of October. The removal of Law and Justice (PiS) from power sparked euphoria on the trading floor and also strengthened the złoty – as everyone now expects a better relationship with the EU, meaning that funds will finally be released that are essential to many industries, including construction. A more transparent management of public finances is also on the cards, including those of the state-owned companies that are listed on the Warsaw Stock Exchange.

The likely changes to economic policy also bring into question the recent trend for the state to take over construction companies that have been awarded large contracts, such as Torpol and Trakcja. With the prospect of the current opposition taking power, a host of new demands are being made on the new government to provide a stimulus package for the residential development market or – to put it simply – to provide further incentives to increase both the supply and demand. On the demand side, there is pressure to continue with the subsidised mortgage programme and to provide even more attractive homes for buyers; while on the supply side, pressure is being exerted to provide more land, including state-owned and inner-city farmland, as well as to shorten permitting and other processes. Encouraging the growth of the rental apartment market is also on the table (including PRS), along with the introduction of REITs. Knight Frank predicts that the apartment stock leased out by institutions will rise, but it is hard to expect that this will play a significant role in plugging the housing shortage. According to the consultancy, by 2028 the number of these types of apartment will approach 100,000, but even at the moment over a million are needed. Home prices, meanwhile, are shooting upwards fuelled by the cheap mortgages subsidised by the government and falling interest rates. In Q3, prices in cities rose across the country at double-digit rates (according to Rankomat), while new homes in Kraków were almost 30 pct more expensive than a year ago. In September, the number of mortgages granted rose by over 170 pct and increased in value by 233 pct to PLN 7.17 bln. Subsidised mortgages accounted for 50 pct of all loans granted.

Construction companies are also waiting for EU funds to be released, including the general contractors of infrastructure projects. As it turns out, Polish firms are becoming increasingly dominant on this market, as international giants are being outperformed by companies the size of Zawiercie-based Intercor, which currently has a roadwork order book worth PLN 10 bln. Third place in the ranking of contractors is taken by another Polish company, Mirbud, with Budimex squeezed into second place. The latter company was previously the leader of the pack and admits to having been more cautious in its fight for contracts, but it has now seen its chance to grow and make money abroad. Budimex reported extremely good Q3 results and is expecting record revenues for 2023 with an order book worth PLN 12 bln, of which the largest part comprises roads (PLN 5.9 mln), whereas its railway orders have decreased. It is currently enjoying high profitability (over 10 pct for the last three quarters), due to which it has been able to pay out some very attractive dividends to shareholders. (Mir)