When will the black swans fly away?

  • 2015 brought a number of events described as “black swans” or “investment shocks” – freeing up the CHF exchange rate, devaluation of the yuan or collapse of commodity prices. In Poland the “black swans” included the Law and Justice (PiS) coming to power, the bank tax and power sector’s investments in coal mines. As a result, Poland was among the worst markets globally, with the WIG Index dropping by 10% in PLN and 18% in USD in 2015.
  • The declines in January confirm that the global challenges – change of the growth model in China and market response to interest rate hikes in the US – are more serious than initially expected. In our opinion, calming of the markets will be a good opportunity to buy European stocks, especially of companies benefiting from increasing consumer demand and low commodity prices. Low valuations of the emerging markets give high hopes for their recovery, but still entail above-average risk.
  • Poland’s economy offers a chance of positive surprises in 2016 thanks to good overall situation in Europe and fiscal easing (500+ program). Contrary to the current consensus, we assume that there will be no further rate cuts and appreciation of the zloty. The main risk for the stock market is the question of the future of open-end pension funds (OFE). We assume that the status quo will hold, but there will be uncertainty in the market until the pension system review is complete.
  • Despite the expected acceleration of GDP growth in 2016, the bank tax and lower commodity prices imply a decrease of the weighted profits of WIG20 companies in 2016 by 8% yoy, according to the existing consensus. Unlike in the case of big corporations, the profits of companies from the mWIG40 Index will increase according to the consensus by 11% yoy in 2016P. Polish equities are still not exceptionally cheap. The WIG20 Index is valued at P/E 11.2x, 5% below the 5-year average of 11.7x. The declines in 2008 and 2011 brought the ratio down to 7.5x.
  • With the current WIG20 Index, the risk of further decreases seems limited but one will have to wait for increases probably till 2H16, when: 1) investors will start to factor in the expected increase of profits in 2017, 2) the risk of deflation and further rate cuts diminishes, 3) the risk of negative changes in OFE diminishes. All this will happen under the condition of stabilization of the global situation.
  • We estimate that at the end of 2016 the target WIG20 level will be 2,000 points, which means a 7.6% growth potential in 2016P (12% including dividends).
  • Industry weights: We recommend a neutral approach to banks, expecting better relative performance only in a few months’ time, when the industry shows how well it deals with the new tax and the interest rate cut risk diminishes. Our preferred banks are Alior, Pekao and Handlowy. Among fuel companies, our preferred company is PKN Orlen, however we are concerned about the impact of decrease of hydrocarbon prices and liberalization of the gas market on PGNiG’s results. Pointing to possible recovery in the commodity market, we a neutral about the mining sector. However we increase the weight for the power sector to neutral, assuming that lots of negative information has already been factored in the price, and further rate drops will be limited by high dividend rates. We continue to be positive about developers.
  • Small and medium-caps – our preferred companies are: AAT Holding, Altus TFI, Arteria, Farm51, Kruk, LC Corp, Marvipol, OT Logistics, Pekabex, Polwax, Selvita, Serinus Energy, Sfinks, Vantage Development and Vigo System.