Stocks report: The three-year rally

Stocks were strong, the leading players being the oil companies and copper producers. In the 1990s we had the internet bubble; this year it was the commodities bull market. We will have to wait a few more months to see if the current uptrend is also a bubble, because at the moment the market is unclear. As always, bubbles are only seen in hindsight, but with the WIG20 at the end of the year trying to beat new historical highs, the majority of the market is optimistic.

As in 2004 the financial sector was very strong and the banks reported record results, beating forecasts in most cases. The natural resources companies, mainly PKN Orlen and KGHM, were unbeatable. After crude and copper prices skyrocketed, PKN and KGHM's share prices more than doubled. The fuel for the market was the highest crude price in history and a price-tag of more than $4,000 (zł.12,842) on a tonne of copper.

Falling interest rates also played their part, which is very positive for banks but is very difficult to predict in the future. The merger of Pekao SA and BPH is already priced into stocks, so the role of this factor is limited. There is still some room for interest-rate cuts as inflation fell to one percent in November and nominal interest rates are still at 4.5 percent. Current expectations for interest-rate cuts are bearish, although not so much as in 2005. Interest rates were cut five times in 2005, and this year could probably bring about a 1-1.5 percentage point decrease to 3-3.5 percent, which would be its lowest level in history.

The outsiders are barely worth mentioning. Telecoms performed very badly relative to the market. Much more was expected from software producers, which were outperformed by the media (TVN was among the best stocks in 2005) and dotcoms.

In 2006, the event to watch for will be the narrowing of the market. In recent years there has been a tendency to concentrate WIG20 members with high liquidity such as TP SA, PKN Orlen and Pekao SA. This year the WIG20 esentially narrowed to the 'WIG5'.

Small caps are thus priced unfairly in relation to the WIG5 members - investors are overplaying the importance of liquidity when they consider their stock price. Many mid and small caps are still very attractive. This anomaly was seen on the US market in the late 1960s, when out of 2000 listed companies, only the 50 biggest were gaining.

Mutual funds gave investors very good results, due to the falling interest-rate environment and the bond-market funds performed very well relative to the stock-market funds. The narrowed market gave priority to index-tracking funds. Those that selected blue chips and managed their part in the total portfolio beat managers that used bottom-up analyses and concentrated on stock selection.

The factors to watch in 2005 are again commodity prices, interest rates and politics. As US Federal Reserve interest-rate hikes will probably calm down, the appetite for emerging markets from the US could still be high. 

Adam Łaganowski, Warsaw Investment Group (WGI)