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There is a gradual return of interest in the stock market in China
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There is a gradual return of interest in the stock market in China

created Forex Club17 May 2024

April was the first month in which the annual inflation rate was higher than the previous reading. CPI inflation amounted to 2,4% and was slightly higher than the March "bottom" of 2,0%. The period of rapid disinflation is behind us, and ahead of us is the period of rebounding inflationary pressure driven by several factors. First of all, the so-called "base effects" that have strongly pushed the inflation level down over the last year. This negative pattern will continue until the end of 2024. Additionally, the first month with the full VAT rate on food is behind us. Already after the preliminary reading of the consumer price index, the managers of VIG/C-QUADRAT TFI notice that retail chains have not translated the full tax rate into the prices of goods. However, we should not delude ourselves. Food prices will probably start to rise again in the coming months, which will translate into higher inflation. Moreover, the partial abolition of protective shields on electricity and gas prices, as announced by the government, may increase the CPI in Poland quite dynamically.

All these factors indicate that inflation will increase again in the rest of the year (probably to 5,5% +/-), and the financial market will be closely watching whether this is just a short-term trend or the return of more persistent inflationary pressure. In such an environment, the lack of interest rate cuts by the Monetary Policy Council in 2024 becomes our base scenario.

BOND MARKETS

TREASURY BONDS

Market treasury bonds this belief was also confirmed, as April was the fourth month in a row when the yields of government instruments increased (stock prices fell). The first month of the new quarter brought negative rates of return on long-term debt products and was the weakest period in over a year. The ten-year bond market is systematically approaching the level of 6%. In the opinion of the managers of VIG/C-QUADRAT TFI, this level may encourage investors to renew their interest in long-term treasury bonds, because against the background of this year's inflation forecasts, the profitability
this one looks attractive.

CORPORATE BONDS

In April, there was little happening on the primary corporate bond market. The companies obtained PLN 560 million from three issues, of which PLN 0,5 billion was obtained by Bank Pekao. Saying goodbye to Catalyst – Everest Capital – issued bonds worth PLN 45 million. The new issue will not be listed on Catalyst, where the last series of this issuer is already listed. Its redemption is planned for June this year. In turn, from the euro-denominated issue, PragmaGO obtained the equivalent of approximately PLN 15 million with a reduction in subscriptions exceeding 17%.

In April, three new issuers appeared on Catalyst (BUDLEX FINANCE, DANTEX GROUP and OKAM INCITY), representing the development industry. April was not full of corporate bond issues, but the situation may change in May, as companies such as Best, Develia, Echo Investment, Enea, Ghelamco Invest, Marvipol Development and Murapol have announced their willingness to issue bonds.

"The industry structure of the April debuts on Catalyst and the upcoming issues leaves no doubt - developers are consolidating their leading position on the Polish corporate bond market." – comments Piotr Ludwiczak, Fund Manager of VIG/C-QUADRAT TFI.

STOCK MARKET

GLOBAL ACTIONS

April was dominated by a correction on stock markets, with particular emphasis on developed markets. It seems that we are dealing with a scenario of gradual improvement in global PMI industrial activity indicators, which (examining historical analogies) translate into higher commodity prices and better behavior of companies from emerging markets and Europe (dominated by cyclical companies).

The good behavior of companies on emerging markets is due to, among others, gradual return of interest in the stock market in China - mainly due to the very low level of valuations in historical terms. This translates positively into the entire emerging markets segment.

On developed stock markets, and in particular the American market, we are dealing with a gradual return of the issue of inflation, and thus postponing interest rate cuts for the future. At the same time, American companies report very good results for the first quarter, despite a theoretically deteriorating macroeconomic environment. This applies in particular to the labor market, which is gradually slowing down.

Who stands out? It is worth noting that the non-obvious success of Chinese brands in the automotive industry (BYD, Xiaomi) and the e-commerce industry (Temu) is starting to negatively impact comparable companies in the US and Europe. On the other hand, the AI ​​revolution is progressing very dynamically. Technology companies stand out because they not only record good results, but also incur the highest investment expenses.

Risks? Investors are beginning to notice the problem with the fiscal deficit in the US, which may and should result in increased borrowing needs in the future, as well as the risk of weakening the US dollar.

NATIONAL ACTIONS

Compared to developed markets, April was a very good month for domestic companies. As a result, domestic companies are no longer cheap in historical terms, although they remain cheap compared to other developed markets.

We recorded a very good month for raw material companies (mainly KGHM due to rising prices copper i silver), as well as consumer (in particular CCC - expecting a significant improvement in financial results against the background of the low result base from previous periods). On the other hand, only a slight change was recorded in the banking sector - so far the main driver of growth on the WSE.

What are the reasons for this? VIG/C-QUADRAT TFI experts notice one thing - the stage of strong appreciation of companies from the banking sector, which were the beneficiaries of increasing interest rates in Poland, is slowly coming to an end. We are slowly entering a period of stabilization of interest rates at a high level, which means stabilization of interest income of the banking sector.

Nevertheless, the stage of raising forecasts for the banking sector can be slowly considered completed. This means that approximately 30% of the WIG index will soon be under some pressure related to the expectation of the first interest rate cuts in 2025 - especially after the end of the dividend payment season.

At the same time, the managers observe a gradual rotation to companies with high debt or perceived as more risky (energy), which clearly lag behind the market average in terms of valuation. This may mean the beginning of the last phase of strong growth - from quality companies, through cyclical and good quality companies, to cyclical companies assessed as weaker in terms of quality.

Analyzing the price/book value ratio - for the first time in many quarters - the domestic stock market was priced above its long-term average. This means that the nominal attractiveness of Polish companies is relatively lower than in previous months. Still, compared to developed markets, domestic companies are relatively attractively valued.

Where are the potential risks for the domestic stock market? In the medium term, the future of Ukraine is uncertain. The conflict is entering a phase where no likely solution is good or satisfactory to both parties to the conflict. Unfortunately, this is a key aspect in the perception of risk in our region of the world. An additional element of risk is the upcoming presidential election in the US, which may introduce more uncertainty to financial markets.


Author VIG/C-QUADRAT TFI experts

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Forex Club
Forex Club is one of the largest and oldest Polish investment portals - forex and trading tools. It is an original project launched in 2008 and a recognizable brand focused on the currency market.