The Year in Review. Warsaw Stock Exchange: The bourse maintains its course

Stocks on the Warsaw Stock Exchange continued their positive trend in 2007 and advanced on a year-to-date (YTD) basis. It wasn't an easy year for investors, however, and some of them have been severely disappointed, particularly those who entered the market in the spring. That was when some symptoms of stock mania could be seen, especially in small and medium-sized enterprises (SMEs). Their benchmarks managed to set their long-term peaks shortly after UEFA decided that Poland and Ukraine would cohost the Euro 2012 soccer championships.

The announcement came as a surprise for many observers and market participants, leading construction stocks to soar, since Poland doesn't have the infrastructure to deal with such an event and some stadiums and hotels must be built. Prior to that developers and construction stocks had seen healthy growth on skyrocketing prices in the housing. An extremely light winter also positively affected construction companies bottom lines, and fuelled stock-market gains.

The US and currency factors

Volatility on US markets sharply increased in the summer months, after the so-called subprime credit crunch. Many international banks lost a lot of money and, worse, no one was able to precisely predict how big the losses really were. This caused fear among investors, leading them to sell and avoid financial institution stocks in general. Sharp falls across the pond negatively influenced other markets around the globe, Poland's included. SMEs were hit particularly hard after a strong H1. Another negative factor was the strong złoty, which affected export companies. These are typically growth companies, the kind which money managers love the most, but falling major currencies had a detrimental impact on their balance sheets. Lower revenues and profits - and especially foreign investments denominated in US dollars - forced analysts to revise their valuations down, which of course sent stock market prices in the same direction. Barlinek, Odlewnie and Groclin were among the biggest casualties of the strong złoty.

Strong performers

Most shares outperformed the market, however, and media, energy and banking stocks were market leaders. Among media stocks Agora (publisher of Gazeta Wyborcza) was a top pick, largely due to its poor showing in 2006, which gave the company plenty of room to grow this year. The firm's long-serving CEO was also replaced, which helped to lift the stock (56 percent YTD, as of the December 13 close).

In the energy sector, Polish natural gas giant PGNiG and Czech power plant CEZ were top gainers (55 and 42 percent, respectively), and rising oil prices likely helped a lot in boosting their prices. Polish banks were also strong, as official interest rates in Poland are still low and the ever-important housing market in Poland - or, rather, the real estate business - is in quite a different cycle compared to Western countries. BRE Bank shares were the top pick there and its stock gained 50 percent.

A look at the indices

When we look at WSE indices' performances in 2007, we see that the small-cap sWIG80 gained the most - it was up 26 percent as of the December 13 close. This benchmark, however, was nearly 26 percent down from its July peak. The overall WIG index and the blue-chip WIG20 managed to gain 14 and 11 percent, respectively. This is positive, but when we compare that return to previous years, it is noticeably lower - the WIG grew 41 percent in 2006 and 33 percent in 2005).

The Techwig was the only main index which was in red for the year, down eight percent. This drop was largely caused by Bioton, which suffered the most among bluechip stocks, and was down by 50 percent on the year. The firm was the darling of WSE investors in the past, but this year everything was against the company and the plummeting dollar did the most damage.

As the end of the year approaches we typically take time to reflect and consider what the next year will bring. I think that 2008 will be even more demanding for investors, as many things remain unclear, including the mood on global stock and currency markets. I think that the first half of the year could be weak, but in the longer term Poland's prospects are very optimistic, and I'm counting on a much better second half in 2008.

Tomasz Jerzyk

Technical Analyst DM BZ WBK SA