WSE delisting talk denied
Down the road to Chile?
The possibility that the switch from emerging market status to a full member state of the EU could send the WSE spiralling down the route to almost complete marginalisation was aired by an analyst at a large fund who, because of the sensitive nature of the issue, asked not to be identified.
What he had to say was this: "I see many problems with regard to globalisation which could result in real problems for local markets. It's connected with the overall changing of the big corporate picture - and the fact that many companies which are present in New York or London will never be present on the WSE, or for that matter in Frankfurt or Berlin. Of course, you cannot blame managers of local exchanges for the consequences of globalisation.
"In respect to companies moving elsewhere, I doubt very much if ComputerLand or KGHM would be able to attract investment in Frankfurt or anywhere else. KGHM is the least effective copper producer with the highest costs in the world, so I seriously doubt if anyone would ever be interested. So, let them stay in Poland to start making progress and put some order in the business here.
"Let's look ahead for four or five years. After we join the EU and then the euro, the country will no longer be treated as an emerging market. There are spatial funds which deal only in emerging markets. Poland rates 1.3% in the emerging markets index. After switching to developed Europe markets, the estimate is that the country will have only eight basis points within that developed Europe, so it means the global emerging markets index will start to fall. The problem is that we are not sure, however, that developed Europe managers will actually be interested in Polish stocks."
The influence of the pension funds on the WSE has, to most of the commentators to whom we spoke, served to isolate the exchange from the unrealities facing those which are much less secluded. And most felt that joining the EU would have little, if any, beneficial effects. This interview supported those with generally negative prospects for the local exchange.
"I think there is a danger that the pension funds present on the market could be able to buy 100% of the free float because there might not be any other players interested in Polish equities," the analyst said.
"Try to look at the Chilean example. The annual turnover on the Santiago exchange is only 6% of the market cap; in Poland it's always about 50%, and in the fat years 70%-80%. The threat is that because of the steady inflow of money, the market becomes overdeveloped in relation to other markets. Look at last year - on a relative basis we gained 25%, and it was nearly all pension-fund money which created that support.
"If we cannot go, foreign Polish equities will remain overvalued as they are now. Foreign purchasers are not interested because they cannot find cheap equities here. If we go to the Chile example here, with a 6% turnover, then there will be a lot of problems for WSE brokers because it would mean a decrease in turnover of some eight or 10 times.
"The WSE does not generate an operational profit. On an operating level it is in the red. Last year when interest rates were quite high, it generated a profit as a whole, but only due to financial profits on investments. There is a problem that in this set of circumstances the WSE could find itself going bankrupt because it would be a disaster if the turnover was to go down."
In terms of financial markets, it's peanuts
Tomasz Frontczak is president and chief executive of AIG PTE, the fourth largest pension fund in the country, and vice president of the pensions funds' trade association. Offering his personal views to the Business Journal, he suggested that some of the major players on the WSE may be about to remove themselves to larger and more attractive exchanges.
"Right now the big ones are almost ready to depart," he said. "They don't need the WSE to get at capital." Had he put that view to Wiesław Rozłucki, the president of the exchange? "We have had a couple of discussions about that. I believe that he understands to a large extent the possible mishaps which may occur in the coming future. But how he's going to react to it, I have no idea."
Frontczak said the prospect of EU accession may influence decisions on whether to stay or go. "Possibly. They have their business strategies which require their presence here or there," he continued. "TPSA for example - what is the reason for TPSA to be on the WSE? It's the result of past deals. They have to be, that's it."
He added: "Look at the chocolate factory here in Warsaw that was acquired by Pepsi and then was sold to Cadbury's. Who needs an individual factory which is part of an international company to be quoted on the WSE?"
The machinery of the market was its biggest problem. "Basically, today they say that zł. 20 million reverses the trend in the market," Frontczak said. "That's about five million dollars or euros. In terms of financial markets, that's peanuts."
Frontczak does not play the market as an individual and says he has no plans to.
Take the money and run
The WSE has parallels with regional exchanges in the US, says Marcin Duszyński, an independent market adviser. Shareholders rarely rushed to get into Philadelphia. But nevertheless, a local exchange which can feature small and medium-sized companies which would not get a look in anywhere else, retained an attraction. It would just be a face in the crowd at Frankfurt, and few would recognise their potential.
"The problem now on the WSE is there are no good assets available," Duszyński said. "If you look at ComputerLand, the shareholding of the investment funds, there is about 30%, the highest proportion on the market. There are very few attractive, dynamic, growing companies."
Many companies lacked a strategy to present themselves to investors. "There have been some spectacular IPOs which roar off and then run out of ideas by the third or fourth quarter," he continued. "For too many companies, it's a question of let's take the money and run."
Duszyński said the major weaknesses of the exchange are its lack of companies and its lack of information. But some companies looking at IPOs were beginning to understand the need for a consistent strategy which would enable them to add value to the stock price from one quarter to the next.
And delistings? Duszyński could not see TPSA handing out the money to buy the firm off the market or selling the business to another operator. But it could parachute onto another exchange if shareholders liked the idea.
No fear of flight
Piotr Szeliga, the WSE's deputy chief executive, denies there was ever any formal proposal to merge with the Helsinki Stock Exchange.
"The president mentioned it but never continued the subject," he said. "And that does not depend on the WSE, but on the treasury ministry, the major stakeholder, because it would mean a privatisation."
He continued: "The WSE is not afraid of losing companies. The migration process in search of better markets exists regardless of the EU. As for now, there is no place for the companies to run to because of the recession. Last year European indices dropped by 20%-30% on average and in Warsaw by a few percent.
Szeliga said the debut of four new companies on the WSE last year was entirely healthy compared with Copenhagen, which had none, six on the Deutsche Börse, two in Helsinki and one in Prague. During 2003, the exchange plans to launch options for the WIG 20 index, despite the economic slowdown.
Szeliga also rejected the proposition that Warsaw may follow the Santiago example and lose turnover to such an extent that its survival could be endangered.
"The WSE has a good fi-nancial situation and is not afraid of such a situation," he said. "We manage to operate even in the economic slowdown. We have a large accumulation of capital. We will survive an even more difficult situation.
"Brokers complaining about a lack of work were facing not problems by the exchange but by the market itself, which continued to be influenced by recessionary forces. In times of economic slowdown there is less work."
Thumbs-down from Piekarski
Business Journal columnist Zbigniew Piekarski poses the question:
what do Poland and Portugal have in common?
Answer: a shrinking stock market.
Turnover is falling; the number of listed companies will reduce as parent companies take them over; the larger companies will leave as access to capital is less problematic on the international exchanges; and the large financial institutions will trade among themselves, thus bypassing the Warsaw exchange.
This process will accelerate once the euro becomes the common currency. At least the Portuguese government has tried to assist by abolishing the 40% capital gains tax. In Poland the government has other plans. The WSE has to look further afield for its recruits in order to survive.
Poor growth a key factor
Marek Świętoń, an analyst at ING Investment Management, can also see no reason why TPSA continues to sit on the WSE.
"The main strategic investor is from France, and after gaining more shares, what is the reason to remain on the market? It makes no sense," he said.
Nor does he foresee any rapid improvements to profit results on the WIG 20.
"You can concentrate on small and medium-sized companies, but there you will face liquidity issues. You can invest zł. 1 million, but not zł. 100 million. There are some big gains - 200% at Groclin (car-seats maker) and 15% at LPP (clothes retailer) - but no-one knows about them outside the country."
For Świętoń, the future of the WSE is intimately linked with the state of the economy. "Few Polish companies have enough profitability along with low earnings, so there's nothing to multiply," he said. "Poland's slow economic growth leads to weak companies."
Then came the issue of liquidity and the restricted opportunities on the exchange.
"If you compare the Polish market to the euro-zone, and especially France and Germany, then the indexes here are down a few percent, but the others are up by 40%," he said.
Świętoń hopes that PKO BP and PZU will make it to the market this year to widen prospects for investors.
Broker sees a shrinking market
The exchange is illiquid, there are too few companies, and pension funds rule the trading, said a stockbroker at one of the largest banks in the country.
"More or less, that says it all," he said, declining to give his name on account of bank rules. "The only hope is that companies such as PZU, PKO BP and LOT will come to the market; they will provide something to invest in. Pension funds have bought almost everything - it may help them find some diversification. Maybe some legislation is needed. It's very hard to say whether the situation will change or not."
The broker referred to the fact that pension funds are restricted on how much of their assets they can invest abroad, which also lends to the low turnover on the WSE. "Politicians would rather keep the money here," he said.
One way to improve the market would be to permit more futures contracts on stocks. He explained that individual investors are often intimidated from investing on the WSE because of the overbearing weight of pension funds. But, as pension funds are not allowed to invest in futures contracts, it would open up an equity-based market for other investors.
"There could be futures contracts on more stocks," he said. "On the open market individuals have no chance. On the futures market there would be a chance. They can only lose on the cash market."
Is there any optimism for the future of the WSE?
"I do believe that privatisations could start this year, but there have been no clear statements from the treasury ministry. Without such companies coming to the market, there will be no market in a couple of years. And there will be no brokers. The market is shrinking It's worrying me a bit."
The possibility that the switch from emerging market status to a full member state of the EU could send the WSE spiralling down the route to almost complete marginalisation was aired by an analyst at a large fund who, because of the sensitive nature of the issue, asked not to be identified.
What he had to say was this: "I see many problems with regard to globalisation which could result in real problems for local markets. It's connected with the overall changing of the big corporate picture - and the fact that many companies which are present in New York or London will never be present on the WSE, or for that matter in Frankfurt or Berlin. Of course, you cannot blame managers of local exchanges for the consequences of globalisation.
"In respect to companies moving elsewhere, I doubt very much if ComputerLand or KGHM would be able to attract investment in Frankfurt or anywhere else. KGHM is the least effective copper producer with the highest costs in the world, so I seriously doubt if anyone would ever be interested. So, let them stay in Poland to start making progress and put some order in the business here.
"Let's look ahead for four or five years. After we join the EU and then the euro, the country will no longer be treated as an emerging market. There are spatial funds which deal only in emerging markets. Poland rates 1.3% in the emerging markets index. After switching to developed Europe markets, the estimate is that the country will have only eight basis points within that developed Europe, so it means the global emerging markets index will start to fall. The problem is that we are not sure, however, that developed Europe managers will actually be interested in Polish stocks."
The influence of the pension funds on the WSE has, to most of the commentators to whom we spoke, served to isolate the exchange from the unrealities facing those which are much less secluded. And most felt that joining the EU would have little, if any, beneficial effects. This interview supported those with generally negative prospects for the local exchange.
"I think there is a danger that the pension funds present on the market could be able to buy 100% of the free float because there might not be any other players interested in Polish equities," the analyst said.
"Try to look at the Chilean example. The annual turnover on the Santiago exchange is only 6% of the market cap; in Poland it's always about 50%, and in the fat years 70%-80%. The threat is that because of the steady inflow of money, the market becomes overdeveloped in relation to other markets. Look at last year - on a relative basis we gained 25%, and it was nearly all pension-fund money which created that support.
"If we cannot go, foreign Polish equities will remain overvalued as they are now. Foreign purchasers are not interested because they cannot find cheap equities here. If we go to the Chile example here, with a 6% turnover, then there will be a lot of problems for WSE brokers because it would mean a decrease in turnover of some eight or 10 times.
"The WSE does not generate an operational profit. On an operating level it is in the red. Last year when interest rates were quite high, it generated a profit as a whole, but only due to financial profits on investments. There is a problem that in this set of circumstances the WSE could find itself going bankrupt because it would be a disaster if the turnover was to go down."
In terms of financial markets, it's peanuts
Tomasz Frontczak is president and chief executive of AIG PTE, the fourth largest pension fund in the country, and vice president of the pensions funds' trade association. Offering his personal views to the Business Journal, he suggested that some of the major players on the WSE may be about to remove themselves to larger and more attractive exchanges.
"Right now the big ones are almost ready to depart," he said. "They don't need the WSE to get at capital." Had he put that view to Wiesław Rozłucki, the president of the exchange? "We have had a couple of discussions about that. I believe that he understands to a large extent the possible mishaps which may occur in the coming future. But how he's going to react to it, I have no idea."
Frontczak said the prospect of EU accession may influence decisions on whether to stay or go. "Possibly. They have their business strategies which require their presence here or there," he continued. "TPSA for example - what is the reason for TPSA to be on the WSE? It's the result of past deals. They have to be, that's it."
He added: "Look at the chocolate factory here in Warsaw that was acquired by Pepsi and then was sold to Cadbury's. Who needs an individual factory which is part of an international company to be quoted on the WSE?"
The machinery of the market was its biggest problem. "Basically, today they say that zł. 20 million reverses the trend in the market," Frontczak said. "That's about five million dollars or euros. In terms of financial markets, that's peanuts."
Frontczak does not play the market as an individual and says he has no plans to.
Take the money and run
The WSE has parallels with regional exchanges in the US, says Marcin Duszyński, an independent market adviser. Shareholders rarely rushed to get into Philadelphia. But nevertheless, a local exchange which can feature small and medium-sized companies which would not get a look in anywhere else, retained an attraction. It would just be a face in the crowd at Frankfurt, and few would recognise their potential.
"The problem now on the WSE is there are no good assets available," Duszyński said. "If you look at ComputerLand, the shareholding of the investment funds, there is about 30%, the highest proportion on the market. There are very few attractive, dynamic, growing companies."
Many companies lacked a strategy to present themselves to investors. "There have been some spectacular IPOs which roar off and then run out of ideas by the third or fourth quarter," he continued. "For too many companies, it's a question of let's take the money and run."
Duszyński said the major weaknesses of the exchange are its lack of companies and its lack of information. But some companies looking at IPOs were beginning to understand the need for a consistent strategy which would enable them to add value to the stock price from one quarter to the next.
And delistings? Duszyński could not see TPSA handing out the money to buy the firm off the market or selling the business to another operator. But it could parachute onto another exchange if shareholders liked the idea.
No fear of flight
Piotr Szeliga, the WSE's deputy chief executive, denies there was ever any formal proposal to merge with the Helsinki Stock Exchange.
"The president mentioned it but never continued the subject," he said. "And that does not depend on the WSE, but on the treasury ministry, the major stakeholder, because it would mean a privatisation."
He continued: "The WSE is not afraid of losing companies. The migration process in search of better markets exists regardless of the EU. As for now, there is no place for the companies to run to because of the recession. Last year European indices dropped by 20%-30% on average and in Warsaw by a few percent.
Szeliga said the debut of four new companies on the WSE last year was entirely healthy compared with Copenhagen, which had none, six on the Deutsche Börse, two in Helsinki and one in Prague. During 2003, the exchange plans to launch options for the WIG 20 index, despite the economic slowdown.
Szeliga also rejected the proposition that Warsaw may follow the Santiago example and lose turnover to such an extent that its survival could be endangered.
"The WSE has a good fi-nancial situation and is not afraid of such a situation," he said. "We manage to operate even in the economic slowdown. We have a large accumulation of capital. We will survive an even more difficult situation.
"Brokers complaining about a lack of work were facing not problems by the exchange but by the market itself, which continued to be influenced by recessionary forces. In times of economic slowdown there is less work."
Thumbs-down from Piekarski
Business Journal columnist Zbigniew Piekarski poses the question:
what do Poland and Portugal have in common?
Answer: a shrinking stock market.
Turnover is falling; the number of listed companies will reduce as parent companies take them over; the larger companies will leave as access to capital is less problematic on the international exchanges; and the large financial institutions will trade among themselves, thus bypassing the Warsaw exchange.
This process will accelerate once the euro becomes the common currency. At least the Portuguese government has tried to assist by abolishing the 40% capital gains tax. In Poland the government has other plans. The WSE has to look further afield for its recruits in order to survive.
Poor growth a key factor
Marek Świętoń, an analyst at ING Investment Management, can also see no reason why TPSA continues to sit on the WSE.
"The main strategic investor is from France, and after gaining more shares, what is the reason to remain on the market? It makes no sense," he said.
Nor does he foresee any rapid improvements to profit results on the WIG 20.
"You can concentrate on small and medium-sized companies, but there you will face liquidity issues. You can invest zł. 1 million, but not zł. 100 million. There are some big gains - 200% at Groclin (car-seats maker) and 15% at LPP (clothes retailer) - but no-one knows about them outside the country."
For Świętoń, the future of the WSE is intimately linked with the state of the economy. "Few Polish companies have enough profitability along with low earnings, so there's nothing to multiply," he said. "Poland's slow economic growth leads to weak companies."
Then came the issue of liquidity and the restricted opportunities on the exchange.
"If you compare the Polish market to the euro-zone, and especially France and Germany, then the indexes here are down a few percent, but the others are up by 40%," he said.
Świętoń hopes that PKO BP and PZU will make it to the market this year to widen prospects for investors.
Broker sees a shrinking market
The exchange is illiquid, there are too few companies, and pension funds rule the trading, said a stockbroker at one of the largest banks in the country.
"More or less, that says it all," he said, declining to give his name on account of bank rules. "The only hope is that companies such as PZU, PKO BP and LOT will come to the market; they will provide something to invest in. Pension funds have bought almost everything - it may help them find some diversification. Maybe some legislation is needed. It's very hard to say whether the situation will change or not."
The broker referred to the fact that pension funds are restricted on how much of their assets they can invest abroad, which also lends to the low turnover on the WSE. "Politicians would rather keep the money here," he said.
One way to improve the market would be to permit more futures contracts on stocks. He explained that individual investors are often intimidated from investing on the WSE because of the overbearing weight of pension funds. But, as pension funds are not allowed to invest in futures contracts, it would open up an equity-based market for other investors.
"There could be futures contracts on more stocks," he said. "On the open market individuals have no chance. On the futures market there would be a chance. They can only lose on the cash market."
Is there any optimism for the future of the WSE?
"I do believe that privatisations could start this year, but there have been no clear statements from the treasury ministry. Without such companies coming to the market, there will be no market in a couple of years. And there will be no brokers. The market is shrinking It's worrying me a bit."
