In which markets and in which asset classes? We have such dilemmas not only in Poland, they concern investors from Berlin, London, New York and Tokyo.
Why is this so important? Because regardless of the country of origin of investors, they are looking for markets (economies) that offer a chance for above-average rates of return. This is possible because the flow of capital encounters almost no restrictions. When such an opportunity is discovered, money starts flowing into that market. Often a lot of money compared to its size. Equally important is that it may last even several quarters.
In our opinion, for stock market investors, Poland is a very attractive market today.
GDP data for the second quarter of 2023 most likely marked a low (y/y GDP decline of approximately -0.6%) and the subsequent quarters should be marked by positive dynamics. GDP forecasts for this and next year say that the Polish economy will grow y/y by approximately 0.5% and approximately 2.5%, respectively. We believe that this is the beginning of a new economic cycle that may last 4-5 years. The conclusion that can be drawn from this is simple: companies listed on the WSE will be direct beneficiaries of the growing economy, which means that company profits should improve in the coming quarters.
Forecast
Source: Bloomberg
The parliamentary elections in Poland ended the eight-year period of rule by the United Right (ZP). It had a major impact on relations with the European Union, economic life in Poland and the perception of companies listed on the WSE. For many investors, especially international ones, these are key issues when deciding to purchase Polish assets.
Relations with the EU should improve as soon as possible and funds from the National Reconstruction Plan (so-called KPO) in the amount of approximately PLN 158 billion should be unblocked. Better relations with European countries may also enable increased mutual trade cooperation and increase the level of foreign investment in Poland.
The opportunity to obtain large investments also results from global trends. Poland’s strategic location and the significant size of our economy mean that for the next decade we may be the beneficiary of the so-called nearshoring, i.e. transferring production, e.g. from Asia to countries with a similar culture that are closer to target markets. This is a huge opportunity to obtain investments with high added value, such as: semiconductors (e.g. Intel factory in Wrocław), or biotechnology. The mentioned trend will support the labor market and enable the acquisition of knowledge and competences that will benefit Poland in the future through the development of sectors based on new technologies.
Poland’s location also means that we are a country offering very good exposure to eastern markets. This may be particularly important when the reconstruction of Ukraine begins, due to its production and construction capabilities. In the future, the large Ukrainian market may become a natural expansion area for many Polish enterprises. In the past, companies with these characteristics were often attractive takeover targets at a premium to current market valuations.
Valuations on the Warsaw Stock Exchange have seemed very attractive for a long time. At the end of October, companies from the WIG20 index were valued at the price-to-earnings ratio for 2023 at 7.6, with a ten-year average of 11.6. For the mWIG40 index, the price-to-earnings ratio was 10.3, with the 10-year average being 13.8. If, as announced by the “victorious opposition”, there is an improvement in the supervision of companies with State Treasury participation, and banks return to paying regular dividends, the risk premium will begin to compress, which will translate into an increase in prices. According to emerging estimates, company valuations may increase by 10 to 20% for this reason alone.
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Source: Bloomberg
The above-mentioned factors combined with the still attractive valuations of companies listed on the Warsaw Stock Exchange make us look at the next quarters with optimism. We believe that the first wave of purchases will focus on companies with the largest capitalization and liquidity. In the next stage, investors will also begin to notice medium and small companies, which, due to high operating leverage, are the greatest beneficiary of the improvement in the economy and significant market sentiment.
Krzysztof Cesarz
managing Skarbiec TFI
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