Vestor DM: the Polish economy is accelerating, at the end of 2017 WIG20 will hit 2150 points

Vestor Dom Maklerski forecasts that the WIG20 index will be at 2,150 points at the end of 2017, i.e. it will grow by roughly 10%.

Vestor Dom Maklerski forecasts that the WIG20 index will be at 2,150 points at the end of 2017, i.e. it will grow by roughly 10%. Rising corporate earnings will be the major driver. Valuation multiples that are close to their historic average values will not change. In turn, the target level of the WIG index at the end of the year is 58,600 points, signifying 13.3% growth.

 

 In 2017 the global capital markets will be affected by the withdrawal from monetary stimulus (rate hikes in the US, curtailment of QE in Europe) and the onslaught of fiscal expansion (Trumponomics). This will drive up inflationary expectations and accelerate the “Great Rotation” from bond markets to equity and commodity markets. In 2017 there will be fewer “black swans”, even though the European election calendar is very full. The rise in protectionist tensions between the US and China may pose a greater risk for global markets

says Tomasz Bardziłowski, Vice-President of the Management Board at Vestor DM.

 

The macroeconomic environment is a boon to the Warsaw Stock Exchange

After the slowdown in 2016, Poland’s GDP growth will accelerate to 3.1% thanks to the influx of EU funds during the budgetary perspective of 2014-2020 and the ongoing robust consumption driven by salary expansion and cash benefits under the 500+ program. Inflation will climb to nearly 2.0% in H1 2017 but the Monetary Policy Board (RPP) will not tweak the interest rates in 2017. The concerns about financing the budgetary deficit will diminish on account of the NBP’s record-breaking profit. Vestor DM expects that the Polish zloty will strengthen at the end of the year.

The earnings of public companies will improve as GDP growth accelerates and commodity prices climb. After the 19% y/y decline in 2016, corporate earnings in WIG20 will grow according to the current consensus by 11% y/y in 2017. The earnings of small and mid-cap companies will grow at an even faster pace whereby the broad WIG index will record growth of aggregate earnings to the tune of 17% y/y after falling by 10% y/y in 2016.

Despite diminishing earnings in domestic companies, the stock market indices rose in 2016. Even so, equities are still not expensive – especially when we consider this favorable moment in the economic cycle.

WIG20 equities are currently priced at a P/E ratio of 12.3x, a mere 2% above the 5-year average. mWIG40 and sWIG80 equities are relatively less expensive with ratios of 12.0x and 10.9x, 13% and 4%, respectively, below their 5-year averages.

 

 – The domestic equity market is also waiting for bills relating to the Capital Accumulation Program, that is, the transformation of open-end pension funds (OFE) into Polish equity funds and the creation of a new third pillar in the form of Employee Capital Schemes. If this program is enacted as it is proposed today, it will exert a positive impact on sentiment toward the Polish market, even though the effects in the form of new capital appearing on the Warsaw Stock Exchange from the new third pillar will not be visible until H2 2018

– says Tomasz Bardziłowski.

 

Vestor DM’s Recommendations

Vestor DM’s analysts recommend overweighing sectors buoyed by rising inflationary expectations, i.e. banks (especially banks unburdened by Swiss franc loans – Pekao is our pick) and commodity companies (KGHM is our pick).

Analysts recommend underweighing defensive sectors, including PGNiG and utilities, chiefly because of their high CAPEX and the absence of any prospects for enhancing dividends. Despite the growth in oil prices, we have a neutral stance on refineries. Vestor DM’s analysts continue to have a positive attitude toward residential property developers, picking them instead of commercial property developers. Despite robust consumption retailers are exposed to the competition posed by the internet and wage pressures.

Vestor DM’s top picks among the small and mid-cap players it covers are Altus TFI, Archicom, LC Corp, Marvipol, Mex, Mercator Medical, Robyg, Selvita, Vantage Development, Vigo System.