Going to market
By : Charles Ward
Tadeusz Bialy has a good feeling. Leaving Bank Ochrony Srodowiska's (BOS) brokerage house last Wednesday, the schoolteacher said he had just picked up an unspecified number of shares in builder Mostostal Plock at zl. 16.50 each. He said he expects the price to double in the next month.
Bialy believes he's on a winning streak justifiably so. After recently cleaning up on information technology (IT) stocks, Bialy said that one of his investments, electronics company Elzab, is up 48% from his purchase price.
"If you have a good, underappreciated stock, sooner or later you'll get your return," he said. "But you have to be patient and confident that the stock's worth keeping in your portfolio."
In recent weeks the Warsaw Stock Exchange (WSE) has hit record levels due to a rally in tech stocks. Despite press coverage given to how inflows from newly created pension funds are influencing the market, individual investors have also played a key role in the WSE's rise. Smaller individuals are estimated to account for 20-30% of overall investment on the stock exchange.
Despite the recent flurry of activity from individual investors, analysts said their involvement is not a new trend. Rather, the market's performance Feb. 11 the WIG was up 47.7% since Oct. 1 has prompted many individuals to make a brief foray into stocks. The prevalence of more secure investment vehicles, such as bonds, T-bills and funds, means that the WSE remains a fairly alien entity to the man and woman on the street.
"When the index reaches new highs, it's a time when individuals who don't buy stocks are usually encouraged by the media to buy (them)," said Pawel Zach, an analyst at Citibank (Poland). "It was the case (during the stock market rally in) 1993 and 1994, and it's probably the case this year."
Bialy said that although he wasn't lucky enough to pick up on the IT boom in its early stages, he has made a substantial amount of money on those stocks, many of which have doubled or tripled since October. But he said he believes the time is ripe to reshuffle his portfolio and look for new opportunities. He has $25,000 invested in the market, 20% of which has gone to Elzab shares.
"It's fantastic and it's enough for me," Bialy said.
It has taken nearly six years for the WIG index, the WSE's main market, to break through its all-time high of 20,760 points set in March 1994.
After a period of consistent growth initiated last October, the WSE finally hit the 21,224.6 mark and then exceeded that on Feb. 9 by setting a new record of 21,742 points. While many blue-chip stocks have experienced rapid price rises in the last five months, investors have focused on information technology (IT) stocks and made a killing.
Between Oct. 1 and Feb. 11, the WIG-20's four IT firms have skyrocketed.
Optimus has been the best performer; its share price soaring 304% in that time. Close behind is Prokom at 203.8%, while Softbank and ComputerLand have also outperformed the market, at 172.3% and 113.5% respectively.
While institutional investors, both Polish and foreign, have piled into IT firms, smaller investors have accounted for 30% of the trading volume in those stocks, said Pawel Puchalski, an analyst at Dom Inwestycyjny BRE Banku.
However, despite the run on IT stocks, individual investor presence in terms of volume has decreased steadily in recent years as more institutional investors entered the market as well as wealthy private investors. Analysts estimated individual investors now account for 20-30% of total market volume, down from 40% in 1998, according to the Committee of Stock Exchange Indexes (KIG). In 1998, foreigners accounted for 40% of inflows with domestic institutions accounting for the remaining 20%, said Arkadiusz Szymanek, KIG's deputy director of the marketing department.
Moreover, given the presence of pension funds on the market since May and June last year, domestic institutions' influence over the market is likely to increase dramatically in both the near and long term, analysts said. Pension funds probably account for around 5% of market volume already, according to analysts. That figure will increase as the average zl. 100 million ($24.4 million) in domestic funds that pour into the WSE monthly hit a projected zl. 500 million ($122 million) by the end of the year, analysts said. And while individuals now likely comprise 30% of the volume of shares traded, that figure includes a comparatively small number of wealthy investors.
In addition, while the number of investment accounts in Poland has risen by 20-30% since 1994, the vast majority of those remain inactive, Szymanek said. "I think the number of individual investors has gone down and the stock exchange has become a place more for professionals," Zach said.
Safe at the bank
Many Poles have too many pressing needs to have any money left to play the market, analysts said. The general public is overwhelmingly preoccupied with consumption, 50% of bank loans issued to individuals are spent on cars alone, analysts said.
"We're still living on credit and spend more money than we get," said Michal Mierzwa, an analyst at COK Banku Handlowego.
While the country saves heavily 12-13% of Polish disposable income last year was put aside much of that money sits in bank accounts. Those secure accounts with their attractive time deposit rates are more popular than the relatively risky stock market, or even safer investment funds, said Michal Szymanski, investment manager at ING BSK Asset Management. With interest rates at 19-20.5% and forecast to rise a further 100 basis points after the Monetary Policy Council's (RPP) meeting next week, the return on basic bank accounts is too attractive, analysts said. In addition, treasury bonds are no longer as popular as they were a few years ago when tax breaks accompanied such instruments. But current rates one-year T-bonds yield 16.98% still make such fixed-income securities competitive to the equity market, Zach said.
Currently, Polish individual investors have a few options open to them if they want to play the market. Either they can purchase specific shares through a brokerage house, or put their money into investment funds or asset-management firms via bank outlets. Investment funds invest that money in stocks and bonds they pick themselves. However, asset management firms offer greater investment flexibility as well as more up-to-date reports on specific stocks and recommendations, Szymanski said.
In contrast, brokerage houses offer less help to individual investors in terms of recommendations and research, merely collecting orders and supplying loans, Zach said. Over the past year the system has gradually changed, with some houses offering greater support to clients with a few hundred thousand zloty to burn, he said. "This tends to be offered rather to big individual clients than to the old lady who wants to invest zl. 1,000 on the WSE," Zach said.
But while few Poles put their money directly into chosen stocks, they have also yet to express any fervor for investment funds. Despite the launch of pension funds last year, Poland is still a long way behind countries such as the United States, where investment and mutual funds move the market, Szymanski said.
However, he said that the problem has less to do with the availability of such ventures, and more to do with the negative perception funds have carried after the WSE's 1994 crash.
Szymanski said that this perception could change in coming years, for two reasons. Firstly, with the launch of pension funds, Poles are more aware that they will have to save their income for the future. As long as such funds prove themselves to be fairly secure and stable operations, consumers will gradually come around and invest more money in similar structures, he said.
Furthermore, over the past year and a half, the WSE has produced stable returns on investments and avoided any hint of a collapse, Szymanski said. On U.S. stock exchanges, the huge flow of capital from individuals' savings or pension plans has resulted in stable growth. "And this is what the WSE needs, two or three years of stable growth" to convince potential investors further, Szymanski said.
Simultaneously, the investment infrastructure is improving with greater innovations in IT, Mierzwa said. "It will make it possible for small investors to be more active," he said.
Later this year, brokerage houses will implement a system called Warset allowing investors to place their orders over the internet, bypassing the broker. He said a similar system was implemented in France last year and revolutionized the stock exchange there. While previously 30-40% of French shares had been traded as global depository receipts (GDRs), this figure has now slumped to 5%, he said. The GDRs attracted foreign investors, who have been less necessary now that the populace has plunged into the market.
Not so savvy speculators
In general, individual investors fall into three categories. Zach said the vast majority of individual investors in Poland are a group 2,000-3,000 strong with an average portfolio of zl. 200,000-zl. 300,000. "They want to make profits and are ready to buy and then sell two days later with news of the changing outlook of a company," he said.
Within this group is a subgroup of speculators, Mierzwa said. Such investors normally focus on small-cap firms and are less concerned with the fundamentals of a company than with inflating its price, he said.
Often this group buys small stakes in such firms with other investors to become majority shareholders, until the price goes as high as it can. He said that this has been the case in recent years with leather firm Chemiskor, trading company Ocean and shoe producer Ariel. "When the demand is huge, they sell and earn a lot of money," Mierzwa said.
Further down the chain is a category of smaller investors on which the first group depends. This group usually buys into a stock when the price has risen by 50-60%. "They are usually the last people to buy in a bull market," Mierzwa said. Such investors are better off entrusting investment funds with their cash, he said.
However, many investors base their decisions on information from newspapers or from reports issued by brokerage houses, Mierzwa said. Tomasz Mazur, a researcher at Radom's Polytechnical University who has played on the stock market for seven years now, said that his recent investments include Polski Koncern Naftowy (PKN) and Pioneer Investment Fund, into both of which he put tens of thousands of zlotys. "This isn't my main activity, I have my job," Mazur said. "But this is something extra, a certain amount of money I play with. I treat it as additional income." So far his biggest success has been now-delisted confectioner Wedel, on which he made a 100% return.
For the most part, those who decide to play the market for quick returns often get it wrong, Zach said. "Individual investors are a group which react almost always too late, at the last stage of the trend," he said. "They tend to buy stocks close to their peaks and they tend to sell shares close to the bottom."
