Political and fiscal stability in Poland should contribute to continuing good returns from both bond and equity markets, with one analyst suggesting that the market could breach the all-time record 20,000-point barrier.
“The way should be clear up to 20,000. That is the old high from 1994 but to do so we need the delivery of good earnings growth from the companies. The market is quite positive on earnings growth for 98, but we have to see it materialise,” says Johannes Sienknecht, emerging markets analyst with Commerzbank in Frankfurt.
“Some of the upside must be gone after the rally that we have seen so far this year, but I would hope that there is some room left in the banking sector,” says Henk Vanndrager, portfolio manager Eastern Europe with ABN AMRO in Amsterdam.
In terms of earnings growth, Vanndrager says that banks will show zero to modest growth. “Longer term one could be quite optimistic but there is some pressure on profitability from increased competition, falling interest margins and capital expenditure with a number of banks wanting to establish a retail network,” he adds. For the industrial sector, he expects average earnings growth of between 10 and 15%.
Sienknecht says that earnings growth of 5–10% can be delivered if the government can engineer a soft landing. “In the worldwide emerging market universe we have an overweight stance for Poland.”
However, until such growth materialises in April or May he will tend to the neutral side. “Poland has a tight fiscal policy, aiming for a 1.5% budget deficit including privatisation already and we have the Polish central bank producing almost prohibitively high interest rates.”
The money market benchmark rate is 24% with an inflation rate year-on-year in January of 13.6%. The zloty has strengthened and sits 4% above its basket, with the crawling peg to the DM having been cut from 1% to 0.8%.
“We are seeing the first successes in the development of the monetary aggregate with lending especially to the non-financial sector coming down from extremely high growth rates,” Sienknecht explains. The rate of growth in this sector was 80% last August but was down to 52% in January.
He has concerns about the rate of wage growth at 20.4% in January this year, or 6 or 7% in real terms. He also sees difficulties for the trade deficit from the strengthening currency with GDP figures for 1998 pointing to $8bn on top of $11bn in 1997. However he believes that strong foreign direct investment should cover the deficit.
For the three months to March the Polish market was the best performing emerging market. “A decline in bond yields has already taken place but there is still a bit of scope for yields to come down further. Investing in Polish fixed income assets remains attractive because of the relatively high interest rates that are given,” says Wike Groenenberg, economist for central and eastern Europe with Salomon Smith Barney in London. “Rates on five-year bonds are about 18.5%, so it gives you a nice carry.”
However she sees some risks to the bond market from the ongoing deterioration in Poland’s external balances which investors will need to monitor closely.
She adds that in the light of planned EU expansion, Poland looks interesting from a convergence point of view. “For an investor with a longer-term outlook it looks interesting to buy longer term bonds and to sit on them until they expire. If you are willing to accept some volatility it gives you an attractive return.” John Lappin