Builders score an own- goal

The main economies of the eurozone are slowing down - as we can see by looking at the leading indicators. The Purchasing Managers' Index (PMI), the leading indicator for the health of the main economic sectors, has fallen to its lowest level for three years. The political paralysis in Greece after inconclusive elections has only served to deepen the negative sentiment of investors. Added to this toxic mix is the uncertainty over peripheral economies, such as Spain, whose credit worthiness has just been lowered by Standard&Poor's from A to BBB+ and whose government seems to be preparing to bailout its banking sector. The European Central Bank, which has twice pumped in EUR 500 bln to keep the banking sector afloat, is struggling to avoid a Lehman Brothers collapse scenario happening in Europe. However, more optimism can be found overseas, with the American economy growing by more than 2 pct on a quarterly basis.
The Warsaw Stock Exchange (WSE), which at the beginning of April had managed to buck the trend set at the time by the plummeting global markets, finally gave way in the second half of the month. The WIG20 index plunged to its lowest level since August 2009. Over the month the blue chip index fell by 9.2 pct, while the broad market index was down by 8 pct. Investor wariness could also be seen in the trading volume, which fell by 37 pct y-o-y to PLN 12.8 bln. According to analysts, this is due to Poland's high trade and budget deficits - two factors that always cast a gloom over the economic outlook, even when international markets are calm. The Warsaw Stock Exchange WIG Construction Index performed poorly - plummeting by almost 16 pct in five weeks and losing 25 pct of the value it had at the beginning of the year. By the end of May the WIG-BUD was at a level last seen in 2005, whereas in April 2007, when the bourse was still booming, the index reached 11,000 points (compared to 1,890 points on May 18th, 2012). The figures on both dates were influenced by one event, Euro 2012: in April 2007 Poland was chosen to co-host the football championships. A large number of public infrastructure projects were then commissioned - a boon for construction companies. Order portfolios grew, but the credit crunch and factors such as the rising prices of raw materials threw contractors' plans into disarray, posing a threat to the profitability of the investments.
Paradoxically, fears concerning the health of the construction sector have been mounting just a couple of weeks before Euro 2012. Weakening investor confidence driven by the threat of the potential insolvency of a number of firms (not necessarily listed on the WSE) has not been alleviated by the results of Warsaw-listed companies. These turned out to be too weak with growing debts across the board, as well as negative margins and cash flows. And all this has happened despite the firms enjoying seemingly high profits. Taking Polimex as an example, the company recorded surprisingly strong profits of PLN 17 mln in Q1 (up by 36 pct y-o-y), but analysts point to the firm's debt of PLN 1.2 bln and operating cash flow of minus PLN 520 mln. From the perspective of the whole sector, Polimex's share price decline of 16 pct over that period was not too significant. Another giant of the industry - PBG - has revealed that it has been negotiating with 12 banks to restructure its debts while its share price has plunged by 40 pct in just five weeks. Hydrobudowa, PBG's subsidiary, has lost almost half of its value. The relatively big slump in the price of Budimex came as quite a shock (it had been one of the few companies that was recently blessed with a ?buy' recommendation from some analysts). In Q1 its figures remained healthy - with revenues 36 pct higher (PLN 1.1 bln) and a strong net profit of PLN 37 mln. Only one company increased in value over the quarter - Mostostal-Export. For developers the past weeks have also not been the happiest time - the WIG Developers Index fell by 11 pct. This time it was residential developers that dragged the results down - J.W. Construction and Dom Development, were down by 20 pct and 13 pct respectively, while GTC did relatively better, falling by just 9 pct.

On the slide
The stock exchanges of the emerging markets have not seen such a sustained series of falls since 1994. This time markets in Budapest and Prague were less vulnerable than their Warsaw counterpart. In a month the BUX fell by 4 pct and the PX in Prague lost more than 5 pct. Although the main indexes of both bourses flattened out at the end of April, they later started to slide. At the end of May, the BUX had returned to its level in January, while the PX fell to its level of last December. The slump was due to the falls in the share prices of banks. PX-listed Orco lost 42 pct in just one month. In Budapest share prices were determined by the standing of the biggest Hungarian bank OTP and oil giant MOL.