Despite a recent uptick in the Polish market, sentiment remains bearish as real economic growth will...
Despite a recent uptick in the Polish market, sentiment remains bearish as real economic growth will require an overhaul of fiscal policy and a cut in rates.
Rafal Wiatr, head of Polish equity research for SchroderSalomonSmithBarney, says economic data published for January points to an upward trend in economic activity in the country. Industrial production was up 3.5% year-on-year, with a 4.7% increase in manufacturing and retail sales were up 6.4%, the strongest year-on-year reading since July 2002.
'Exports are still holding strong, appearing almost unaffected by the EU downturn. Inflation is still under control, unlikely to exceed 2% in December 2003,' says Wiatr.
Stuart Richards, emerging Europe investment manager at Baring Asset Management, believes the Polish macro environment is the least attractive in the central European region at present. It has been in recession for the past couple of years and despite some signs of recovery, such as the slight pick-up in the retail sales sector, further growth is required, he says.
There are signs of a cyclical recovery, consensus figures have been reduced and trade figures are improving but consumption growth is still needed, he notes.
'The signs of growth are not really strong enough, as any increase is coming from a very low level,' Richards says. 'There needs to be further easing in monetary policy from the central bank.
'The Polish government currently has a loose fiscal policy because of its deficit, which has been widening over the past few years, but Poland needs to improve its position with a lowering of interest rates to allow a pick-up in the economy.'
The SLD/PSL coalition has now become a minority government, a situation Richards says will make it difficult to push through any policy alterations. Wiatr, however, says recent votes in parliament have shown that it has been able to pass bills with the support of various opposition parties and independents.
'I would predict economic growth of around 2.5% in 2003. We are forecasting a pick-up in the second half of the year,' says Richards.
Wiatr agrees monetary easing should continue and anticipates rates being cut from the current 6.25% to 5.25% by the end of the year, with a 25 basis point cut expected at the end of March.
Richards notes pension funds continue to provide strong but sporadic support to the Polish stock market. Wiatr adds February transfers from the social insurance institution, ZUS, to pension funds were well below expectations, totalling ZL480.5m versus ZL740m in January.
He says: 'The pension funds' equity allocation fell to 24.7% from 25.2% in January. Given the shortfall in February, we expect transfers from ZUS in March to reach ZL1.1bn, giving some support to the market.'
Richards adds: 'If the economy improves this year Poland could perform better than its neighbours. The sector which would benefit most from its growth would be banking, provided the improvement is domestic-led.'
Wiatr is underweight Poland. Among the large-cap stocks he is positive on are Prokom and PKN as well as BPH-PBK in the banking sector. He adds Kety, PGF and Echo Investment remain his top picks among the mid-cap stocks.
Economic pick-up expected later in year.
Industrial production up on year-on-year.
Inflation under control.
Rate cut required to boost the economy.
Weakest economy in the region.
Pension fund transfers below expectations.
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch
To drive progress