A period of increased volatility in bonds is ahead of us

The managers of VIG/C-QUADRAT TFI noticed that investors' expectations regarding a further decline in inflation (and, consequently, further easing of monetary policy) are red hot. While they agree with the fact that the coming months will bring a further, quite strong decline in inflation (December's reading was 6,2%), the cyclical recovery, fiscal stimulus, the end of base effects and the withdrawal from inflation shields should increase the CPI. in the second half of the year. These risks are also recognized by the Monetary Policy Council, which has become cautious in communicating further interest rate cuts.

Additionally, there are also recent strong economic conditions in the United States (much higher growth CBA, strong labor market) show that the optimistic path of cutting interest rates (the market until recently expected 175 basis points of cuts) by the US FED may not take place. However, for now, the trend of falling profitability (increasing bond prices) has its momentum and investors do not accept any other scenario than the continuation of the positive trends from last year. The attitude of VIG/C-QUADRAT TFI is not so optimistic – experts believe that the first "rumblings" of volatility in January may herald that this year will not follow last year's pattern (like the undisturbed bull market in fixed-coupon bonds). In an environment where investor expectations and warnings coming from the real economy do not match, particular caution should be exercised. In the current macroeconomic environment, investment fund managers continue to believe that a variable coupon represents the best ratio of potential reward to risk.

“In an environment where investor expectations do not match the warnings coming from the real economy, special caution should be exercised. In the current macroeconomic environment, we continue to believe that a variable coupon represents the best ratio of potential reward to risk.” - comments Fryderyk Krawczyk, Investment Director of VIG/C-QUADRAT TFI

Corporate bonds: The beginning of 2024 was not easy for issuers...

The beginning of 2024 was not easy for issuers due to the short period between the New Year and the start of the holidays. In January, companies issued the fewest bonds since August 2023. Only four issuers decided to issue corporate bonds, raising almost PLN 300 million. In turn, five companies decided to make early redemptions and, in total, they prematurely redeemed bonds worth PLN 900 million. This was the first month in recent memory when issuers raised less new capital than they allocated for early redemptions. The small supply of new securities combined with very strong demand translated into significant reductions on the primary market (an average of 64% in issues of Ghelamco Invest, PragmaGO, Vindexus) and price increases on the secondary market.

“I expect that more issues should appear on the market in February than in January. Due to the high demand, the market situation was undoubtedly favorable for holders of floating-coupon corporate bonds.” – adds Piotr Ludwiczak, Fund Manager of VIG/C-QUADRAT TFI

Global Actions: "All in AI" – concentration of growth on a narrow group of subsectors and companies

Before our eyes, the euphoria associated with the explosion of interest in artificial intelligence is emerging - not only from the side of financial investors, but also the broader social fascination with this type of products and solutions. In previous months, VIG/C-QUADRAT TFI experts pointed out that the business dominance of leading technology companies is beyond question, mainly due to the revolution in the field of generative artificial intelligence. On the one hand, we can observe a very strong concentration of growth in companies from this subsector. This applies to: semiconductor manufacturers, manufacturers of machines for this sector and the largest companies in the software and communications industry.

On the other hand, the valuation difference with other industries, in particular cyclical companies (banks, automotive and raw materials), is increasing. What is even more interesting, sectors sensitive to high interest rates, such as real estate and clean energy, performed very poorly. Index valuation levels S & P500 and NASDAQ100 are above their long-term averages. This is mainly due to the strong, positive contribution of technology sectors to the results of the main indices.

Does VIG/C-QUADRAT TFI see? "valuation bubble" in the technology sector?

Yes, but in a smaller part and applies to individual sub-sectors and companies. The vast majority of growth in the largest companies is strongly correlated with very good business momentum and strict cost control (another round of layoffs in technology companies), which translates into solid, double-digit growth in earnings per share.

Risks?

They have not changed compared to recent months. It is definitely worth following geopolitical events, because the number of hotspots in the world is growing (Ukraine, the Middle East and China-US relations). Another important element is that leading central banks keep interest rates at a relatively high level.

Each month brings us new, important information - especially from the real estate market in the USA and Europe. This cannot be underestimated.

“The business dominance of leading technology companies is unquestionable, mainly due to the revolution in the field of generative artificial intelligence. On the one hand, we observe a very strong concentration of growth in companies from this subsector. On the other hand, the valuation difference with other industries, especially cyclical companies, is increasing.” - adds Marek Kaźmierczk, Senior Equity Fund Manager, VIG/C-QUADRAT TFI.

Domestic shares: zdrow correction "in flight"

Strong increases at the end of the year contributed to a several percent correction on the Polish stock market in the first half of January, but nothing dramatic or undermining the positive sentiment towards the domestic stock market occurred.

Staff exchange in State Treasury companies

From a local perspective, this is not the most important event. However, the perspective of a foreign investor is slightly different and broader. It can even be said that a skillfully conducted HR policy will be another so-called a "milestone" on the map of foreign investors. A slightly better perception of corporate governance in companies increases the likelihood of increasing interest in the domestic stock market and, therefore, increasing allocation in portfolios to Poland.

Where are the potential risks?

After a healthy correction in the first half of January, the main risks appear to be centered on rising global geopolitical tensions. This is a major element of uncertainty in global financial markets.

“In terms of valuation, the domestic stock market is at the level of its historical averages. We believe that from this level, further "climbing" of the domestic stock market will be slightly more difficult. The main arguments for continued growth are Poland's solid macroeconomic foundations for 2024 and the possible inflow of capital to the domestic stock market. - comments Marek Kaźmierczak, Senior Equity Fund Manager, VIG/C-QUADRAT TFI.