Falling international markets, surprise rate increase cause WSE to nosedive
The Warsaw Stock Exchange (WSE) plunged nearly 7% last week, with the all-share WIG index closing at 14,550.10. Volume also dropped to zl. 520 million ($130 million), down by 1.77% on the week.
Falling markets globally pulled the WIG down, but the slide was exacerbated by a surprise rate hike by the Monetary Policy Council (RPP) last Wednesday, analysts said. (See related story, page 3) "Some of our clients are getting orders from abroad to reduce positions in telecoms and IT, and are selling TPSA (Telekomunikacja Polska) and Elektrim at any price," said Rafal Gebicki, head of research at Raiffeissen Capital and Investment Polska.
But by late Friday, Dresdner Kleinwort Benson had upped its recommendation on Elektrim to "add" from "reduce," noting that the share was trading at a 22% discount to its target price of zl. 50.
The RPP's decision to raise the intervention rate by 1% to 14% caught all market players off guard, Gebicki said. However, discount and Lombard rates remain unchanged. The RPP cited credit growth and the risk of rising inflation as reasons for the rate hike.
Weak markets elsewhere the Dow Jones industrial average index was down 5% on the week also hit the WIG. "Investors should not expect Polish stocks to rise in a context of falling international markets," said Pawel Zach, senior researcher at Citibank (Poland).
In addition, "it's not unusual for portfolio managers to book their profits now," said Pierre Bergeron, head of economic and financial research at Citibank (Poland).
The market is waiting for two key data releases this week: The current account and trade deficit figures will be announced on Friday. "Everything is on hold until we get those," Gebicki said.
In company news, Merrill Lynch downgraded its investment recommendation for Bank Handlowy, from "neutral" to "reduce," with a long-term "neutral" stance.
"In overview the shares are fundamentally overvalued," the report said.
According to Merrill Lynch, if the planned merger with BRE Bank goes through, a 12-month price target would be zl. 49, and zl. 40 if the merger doesn't materialize. Last week Handlowy closed down at zl. 48.50.
Merrill Lynch supports the idea of the merger, seeing it as a positive example of necessary sector consolidation that would bring some relief from rising cost pressures and margin compression. The estimated savings from the merger are forecasted at a level of zl. 165 million ($41 million) per year.
However, in light of the displeasure of the Treasury Ministry and insurer Powszechny Zaklad Ubezpieczen (PZU) over the proposed share-swap ratio under which one share in BRE would be swapped for 2.6 Handlowy shares, the question arises whether this opposition will result in a modified deal. But until the proposed merger takes place, Merrill Lynch assumes that Handlowy's profitability will be at the weak end of the sector.
"Overall we expect NIM (net interest margin) 50 basis points below the sector average, with a margin on 1999 interest-bearing assets of 3.8%," said the report.
According to Merrill Lynch forecasts, Handlowy's 1999 net profit will fall 17% to zl. 386 million ($110.3 million) compared to the previous year.
During the first half of the year, lending in Handlowy slowed to 2% growth by the end of June. However, Merrill Lynch expects signs of a pick-up in the second half, supporting full-year 10% growth expectations.
