In annual ritual, "January effect" lifts shares on WSE
The all-share WIG index rose 12.6% last week to close at 14,410 last Friday, its highest point since last August. Volume of zl. 1.08 billion ($309 million) was up 39% on the previous week.
But analysts believe that, just as has happened over the past two years, any rally is likely to be short-lived due to another WSE phenomenon - "the earnings effect."
This is when investors tire of poor earnings among Polish listed companies and sell off holdings, sending the WSE into first a nose dive and then a moribund state.
Last year the market surged from 14,886.2 on Jan. 5 to 18,582.7 on March 11, a 24.8% increase, only to begin a slow downward climb throughout the rest of the year. The WIG closed 1998 at 12,795.6, posting a 14% drop for the year.
The current rally is due to pent-up demand among investors, strong performances on worldwide markets and the introduction of the new euro, analysts said.
This rally will last less than a month and the rest of the year will show a downward trend, said Marcin Billewicz, an equity analyst with ING Barings. Investors are currently looking to pick up stocks and sell off quickly. "I don't think we will come back to the 20,000 (WIG) levels," he added.
Poor corporate earnings and a lack of management restructuring of companies will serve as major limitations on the market's potential this year, Billewicz said.
These lackluster earnings have, in the past, leveled what Merrill Lynch equity analyst Stephen Pettyfer calls the "January factor."
Foreign fund managers return from holidays, revisit their asset allocations and place more money into markets like Poland, explained Pettyfer. However, problems have arisen over the past two years, and probably will once again, when the investor realizes the lackluster earnings of Polish companies.
Pettyfer sees the current rally lasting weeks, or possibly months, depending on whether Brazil knocks back the entire emerging market situation.
The region generally has benefited from the traditional January rally, agreed Sarah Pohlinger, senior fund manager for Societe Generale's Central and Eastern European Opportunities Fund. But, she added, the market spike also occurred from an "overflow" of the effect of the new euro currency on the market. The debut of the euro highlighted that Poland, the Czech Republic and Hungary will soon enter the European Union.
"It's possible that people are looking at Poland and seeing that although the earnings outlook is not good, ratings and valuations are reasonably low," Pohlinger said.
The rally is likely to be dependent on Brazil and other emerging markets, Pohlinger said. "If the emerging market risk premium increases again then all emerging markets will be affected," she added.
Yet as Poland draws closer to the West, the country will be less affected by the performance of emerging markets, she added.
More is at play with this rally than just a traditional January spike, agreed Glenn Wellman, managing director for Credit Suisse Asset Management and lead portfolio manager of The Central European Growth Fund. "The market basically goes dead at the end of the year. You have pent up demand," Wellman said. "There is a January effect, but this year there is more going on."
Wellman pointed to the strength of markets in the United States and Europe, Poland's positive inflation news and an "element of rebound" generated from Elektrim's improving situation as factors behind the current market surge.
Investors are realizing Poland's low interest rates, low inflation, and steady growth, he said. Poland is undergoing a "gradual transition from being an emerging market into a developed market," Wellman said.
The interlocking of the Polish economy with the West is an important gauge of this rally's longevity, he added.
"This is a short-term rally in a long-term bull market," Wellman said.
While most analysts agree that Poland's growing connection with the West will help to boost the overall Warsaw market, many see a continued need to appraise companies individually based on earnings potential rather than pursuing a broad-brush investment strategy.
"Poland is an extremely attractive market," said ING Baring's Billewicz, pointing to Poland's strong gross domestic product growth, sizable market and growing economy. "The market has potential but you have to exploit that potential" by assessing companies and their management capabilities individually.
"You have to be really happy with the management you invest in," he said.
The thing to go for in Poland is earnings visibility and earnings growth, Pohlinger said. Investors should look at Poland's IT sector stocks and telecoms.
In other market news, Dutch firm Kalon announced a cash offer for up to 60% of shares in paint manufacturer Polifarb Cieszyn-Wroclaw at a price of zl. 10 per share. Full take up of this offer will give Kalon a 65% stake in Polifarb.
The offered price, according to the company, represents a premium of 65% to the six-month average price. Polifarb closed at zl. 9.5 on Friday, a 14.4% increase over its 1998 year low on Oct. 22 but a 48.6% decrease from its 1998 year high on Feb. 23.
The offer is dependent upon Kalon receiving acceptance of not less than 20% of Polifarb's issued share capital. The cash offer will be open from Jan. 12 through Feb. 8.
"Having created outstanding success in Hungary and other developing markets over the last few years, we believe that Kalon's technological know-how, production and distribution skills, marketing expertise and financial support will make a significant contribution to Polifarb's future development," said Mike Hennessy, group managing director of Kalon, in a press release.
But analysts believe that, just as has happened over the past two years, any rally is likely to be short-lived due to another WSE phenomenon - "the earnings effect."
This is when investors tire of poor earnings among Polish listed companies and sell off holdings, sending the WSE into first a nose dive and then a moribund state.
Last year the market surged from 14,886.2 on Jan. 5 to 18,582.7 on March 11, a 24.8% increase, only to begin a slow downward climb throughout the rest of the year. The WIG closed 1998 at 12,795.6, posting a 14% drop for the year.
The current rally is due to pent-up demand among investors, strong performances on worldwide markets and the introduction of the new euro, analysts said.
This rally will last less than a month and the rest of the year will show a downward trend, said Marcin Billewicz, an equity analyst with ING Barings. Investors are currently looking to pick up stocks and sell off quickly. "I don't think we will come back to the 20,000 (WIG) levels," he added.
Poor corporate earnings and a lack of management restructuring of companies will serve as major limitations on the market's potential this year, Billewicz said.
These lackluster earnings have, in the past, leveled what Merrill Lynch equity analyst Stephen Pettyfer calls the "January factor."
Foreign fund managers return from holidays, revisit their asset allocations and place more money into markets like Poland, explained Pettyfer. However, problems have arisen over the past two years, and probably will once again, when the investor realizes the lackluster earnings of Polish companies.
Pettyfer sees the current rally lasting weeks, or possibly months, depending on whether Brazil knocks back the entire emerging market situation.
The region generally has benefited from the traditional January rally, agreed Sarah Pohlinger, senior fund manager for Societe Generale's Central and Eastern European Opportunities Fund. But, she added, the market spike also occurred from an "overflow" of the effect of the new euro currency on the market. The debut of the euro highlighted that Poland, the Czech Republic and Hungary will soon enter the European Union.
"It's possible that people are looking at Poland and seeing that although the earnings outlook is not good, ratings and valuations are reasonably low," Pohlinger said.
The rally is likely to be dependent on Brazil and other emerging markets, Pohlinger said. "If the emerging market risk premium increases again then all emerging markets will be affected," she added.
Yet as Poland draws closer to the West, the country will be less affected by the performance of emerging markets, she added.
More is at play with this rally than just a traditional January spike, agreed Glenn Wellman, managing director for Credit Suisse Asset Management and lead portfolio manager of The Central European Growth Fund. "The market basically goes dead at the end of the year. You have pent up demand," Wellman said. "There is a January effect, but this year there is more going on."
Wellman pointed to the strength of markets in the United States and Europe, Poland's positive inflation news and an "element of rebound" generated from Elektrim's improving situation as factors behind the current market surge.
Investors are realizing Poland's low interest rates, low inflation, and steady growth, he said. Poland is undergoing a "gradual transition from being an emerging market into a developed market," Wellman said.
The interlocking of the Polish economy with the West is an important gauge of this rally's longevity, he added.
"This is a short-term rally in a long-term bull market," Wellman said.
While most analysts agree that Poland's growing connection with the West will help to boost the overall Warsaw market, many see a continued need to appraise companies individually based on earnings potential rather than pursuing a broad-brush investment strategy.
"Poland is an extremely attractive market," said ING Baring's Billewicz, pointing to Poland's strong gross domestic product growth, sizable market and growing economy. "The market has potential but you have to exploit that potential" by assessing companies and their management capabilities individually.
"You have to be really happy with the management you invest in," he said.
The thing to go for in Poland is earnings visibility and earnings growth, Pohlinger said. Investors should look at Poland's IT sector stocks and telecoms.
In other market news, Dutch firm Kalon announced a cash offer for up to 60% of shares in paint manufacturer Polifarb Cieszyn-Wroclaw at a price of zl. 10 per share. Full take up of this offer will give Kalon a 65% stake in Polifarb.
The offered price, according to the company, represents a premium of 65% to the six-month average price. Polifarb closed at zl. 9.5 on Friday, a 14.4% increase over its 1998 year low on Oct. 22 but a 48.6% decrease from its 1998 year high on Feb. 23.
The offer is dependent upon Kalon receiving acceptance of not less than 20% of Polifarb's issued share capital. The cash offer will be open from Jan. 12 through Feb. 8.
"Having created outstanding success in Hungary and other developing markets over the last few years, we believe that Kalon's technological know-how, production and distribution skills, marketing expertise and financial support will make a significant contribution to Polifarb's future development," said Mike Hennessy, group managing director of Kalon, in a press release.
