This Booming European Economy Is Missing One Thing

(Bloomberg) --

It’s one of Europe’s strongest economic growth stories this year, yet one of the world’s worst stock market performances.

While Poland enjoys a booming economy, its equity market has completely missed the global stock rally amid a sell-off in local banks and utilities, and there’s no sign that things are about to brighten up next year.

The country’s benchmark, the WIG20 Index, is set to end 2019 among the weakest stock markets worldwide, with a loss of 6.4%. That’s in sharp contrast with the Stoxx Europe 600 Index’s 23% gain this year. 2020 may be even tougher, as Poland’s economy is set to slow to 3.4%, the slowest pace in five years.

Polish banks have been hit particularly hard, with Bank Millennium SA down 38%, Santander Bank Polska SA dropping 16% and PKO Bank falling 11%, hurt by a string of legal battles with borrowers after their foreign-currency mortgages ballooned. A verdict from the European Union’s top tribunal in October has opened the door for the potential cancellation of half of the $31 billion in outstanding non-zloty loans, which means litigation risks are set to prevent any rebound in the sector next year.

“Already low valuations of Polish stocks won’t be enough bait for investors in the coming months,” Kamil Stolarski, an analyst at Santander Bank Polska brokerage, said by phone. “Banks that weigh about 30% in the Warsaw benchmark face intensified legal issues with their foreign-exchange mortgages that are impossible to quantify.”

Cause Alarm

The picture isn’t prettier in the state-controlled utilities sector. PGE is down 17% this year, Tauron 24% lower and the gas company known as PGNiG declining 40% as investors dumped the shares amid environmental worries about the future of the mostly coal-based electricity production business and the state’s drive for cross-industry consolidation. Refiner Orlen SA’s bid for power utility Energa SA announced Dec. 5 caused alarm that the government may use stronger entities to support weaker ones with controversial investment projects, such as building the Ostroleka power plant.

“This year we saw that a strong economy is not enough to bring investors to the capital market,” Grzegorz Zawada, the head of PKO’s brokerage said. “The exchange needs new stories to regain its allure for investors.”

For now, Poland’s equity market is showing no signs of life that could resemble the initial public offering bonanza from the last decade. The value of shares sold in IPOs this year dropped to 45 million zloty ($12 million), the lowest level since at least 2003, according to data from the Warsaw stock exchange, as private equity funds offer more attractive opportunities.

Delistings outnumbered IPOs in Warsaw’s main equity market in each of the past three years. Departures have included chemical company Synthos SA, homebuilder Robyg SA, Globalworth Real Estate Investments Ltd., car fleet company Prime Car Management SA, or planned departure of hotelier Orbis SA.

Brokerages are seeking stocks that could benefit from strong domestic demand. The debut of the Dino Polska SA food supermarket chain in 2017, for example, provided fourfold returns. Potential offering of Steinhoff International Holdings NV’s fast growing discount clothing and decor chain Pepco may be one of them. There is also the hope that the market will be stirred by additional investment flows emanating from the government’s new program to boost pension savings.

Still, the ultimate success of the plan isn’t yet known, as initial employee participation -- at 39% -- turned out to be lower than expected.

Game Hype

Not all Polish stocks have had a bad year. Telecom companies have risen on hopes that a local price war will fade, while retailers have also benefited from a consumer spending boom. Computer game maker CD Projekt SA, the bourse’s new darling, has surged 76% in 2019, buoyed by the hype around a new blockbuster game scheduled for release next April.

But pressure continues. Corporate defaults already hurt this year’s earnings for Alior Bank SA and Bank Handlowy SA. For most lenders, the key for 2020 will be how quickly they will need to increase provisions for foreign-exchange loans after discussions with auditors.

Utilities still face the challenge of power imports, cost pressure from rising carbon allowance prices and uncertainty whether the government will still compensate them for freezing household electricity prices. Trigon brokerage has an underweight rating on both power utilities and banks because of elevated risks and also suggests caution for industrials due to rising labor costs.

The uncertain outlook for banks and utilities “are factors that will keep discouraging investors from taking a position, as they cannot understand the risks fully,” Santander’s Stolarski said.

To contact the reporter on this story: Konrad Krasuski in Warsaw at kkrasuski@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Jon Menon, Tom Lavell

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