AI, Bitcoin and a growing number of sectors are participating in the growth

The company's quarterly results NVIDIA once again attracted attention and did not disappoint investors' expectations. One might add that the last non-believer in the generative revolution artificial intelligence they capitulated. This is both good and bad news, because the markets are somehow "hostage" to one company and its derivative businesses.

Creation of the first ETFs for Bitcoin and a significant inflow of funds into this type of solutions contributed to a significant increase in the bitcoin price this year. Companies benefiting from investors' interest in cryptocurrencies deserve a separate comment. It seems that most companies from this subsector listed in the US are characterized by very high volatility and very weak fundamentals (financial results, balance sheet or cash flows). As a result, they represent the speculative part of the investor market linked to changes in the underlying instruments. It is worth remembering this to avoid surprises in the future.

Growing participation of sectors in index increases

In the previous months, the business dominance of leading technology companies was unquestionable, mainly due to the revolution in the field of generative artificial intelligence. As a result, the majority of the increases in the core indices were concentrated on the behavior of a few largest companies. Nevertheless, the largest technology companies (in particular those producing software and semiconductors) were joined by industrial, consumer and financial companies. Interestingly, the prices of most companies from the "green energy" industry have stopped falling. Despite relatively high valuations in developed markets, this should be assessed positively.

Risks? Relatively high index valuations in historical terms, geopolitics (growing number of conflicts in the world) and a possible return of inflation resulting from the "strong consumer" in the world.

NATIONAL ACTIONS

Banks were supposed to be the guarantor of the boom, and that is exactly what they are doing

The managers of VIG/C-QUADRAT TFI emphasize that it cannot be ignored that the banking sector is on a very attractive profit trajectory this year. High interest rates, tight cost control and a solid macroeconomic situation make the reported earnings dynamics in the banking sector impressive. Let us remember that this is also one of the few liquid sectors that can be bought or sold relatively efficiently by foreign institutional investors. The contribution of other sectors (maybe apart from LPP representing the retail sector) was practically insignificant for the further growth of the indices.

Staff exchange in State Treasury companies and KPO

With the new year, the personnel carousel in companies controlled by the State Treasury has accelerated. There are many indications that this will be positively received by foreign institutional investors - especially in the context of companies included in the WIG20 index.

Additionally, announcements about the release of funds from the KPO should be a catalyst for growth for medium and small companies in the second half of the year.

Co dalej?

In terms of valuation, the domestic stock market is slightly above its historical averages. Nevertheless, the relative valuations of companies are very attractive compared to global stock markets. 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.

Where are the potential risks for the domestic stock market?

After a very good February with solid single-digit rates of return in every category of companies (large, medium and small), there are no significant risks in the short term, mainly due to the gradual recovery in the global industry. The fact of agricultural protests (due to lack of exposure to the WSE) in Poland does not change this. In the medium term, the uncertain future of Ukraine is a key aspect in the perception of risk in our region of the world.

BOND MARKETS

Corporate bonds – nohey, but not as good as in 2023

The primary corporate bond market revived after the holidays, although it is still far from the records of last year. Catalyst companies acquired PLN 1,6 billion, which means a fivefold increase compared to January. PKO BP, which obtained PLN 1 billion, is mainly responsible for improving the statistics. Another PLN 0,5 billion was collected by three companies that issued approximately PLN 170 million each. MLP Group raised the equivalent of approximately PLN 176 million from the euro issue. KRUK raised approximately PLN 173 million from three issues, including one issue that resulted in a 75% reduction in subscriptions. In turn, Echo Investment obtained PLN 170 million, of which PLN 100 million was a "roll" of bonds maturing in 2024-2025. Ronson Development successfully refinanced bonds worth PLN 60 million.

The Polish secondary market saw a slowdown in price growth, which increased noticeably in January. In turn, on the foreign market there was a further narrowing of credit spreads with a simultaneous increase in yields on treasury bonds.

There is still very strong demand among investors, both individual and institutional. Subscription reductions in most issues on the primary market in February exceeded 50%, which should encourage issuers to place new debt. The decline in the number of issuers and series remains a structural problem of the market. In February, WB Electronics and the Property Rights Exchange "Vindexus" returned to Catalyst, but these are the only "new" issuers.

TREASURY BONDS

Variable coupon bonds

February turned out to be another great month for conservative solutions. In line with previous forecasts, instruments based on variable coupons appear to be the winners of this year's race in the debt segment. The change in the rhetoric of the Polish central bank, which began to place stronger emphasis on inflation processes in relation to protecting economic growth, also influenced investors' expectations as to the further development of interest rates on the Vistula. Financial markets are beginning to cautiously back away from their forecast of a strong cycle of interest rate cuts this year. Inflation risks (ending the "inflation shields", revival of consumption), which may materialize in the second half of the year, mean that we may forget about changing interest rates in Poland in the near future. In such an environment, a variable coupon becomes a natural beneficiary, because it means that higher WIBOR rates, which are the basis for interest rates on instruments in conservative products, will remain with us for longer.

It still seems that solutions based on variable coupons should perform relatively well in 2024. Additionally, the ratio of potential profit to risk offered by this type of solutions is very attractive.

Fixed coupon bonds

February turned out to be neutral for fixed coupon funds.  The domestic debt market is still slowing down amid very positive inflation readings. The last January reading of the annual CPI was 3,9% and was the lowest reading since March 2021 (even before the outbreak of the conflict in Ukraine).

However, despite the continuation of the wave of disinflation, investors are beginning to worry about the shape of the interest rate path in the coming quarters. The latest statements of the chairman of the Monetary Policy Council indicate the growing concern of the monetary authorities regarding the durability of the current trend of declining inflation. In particular, concerns about a renewed increase in consumer inflation after the end of the so-called "inflation shields". The change in the narrative by the Monetary Policy Council increases the risk of no further adjustment of interest rates, which was previously very strongly played by investors. The consequence of the change in financial market optics regarding interest rates in Poland is the return of volatility to debt markets. VIG/C-QUADRAT TFI experts see the results of higher volatility in the February results of solutions with exposure to interest rate risk.

The changing perception of the path of inflation and interest rates will have an impact on the valuation of fixed-coupon bonds more than once this year. It seems that this year will no longer be as clear for this product category as it was in 2023. We must also not forget that CPI inflation due to the so-called "base effects" (i.e. very high readings last year) should continue to decline for two or three months. It is highly probable that this quarter we will see the CPI return to the central bank's target (i.e. the range of 1,5% to 3,5%). What will be the reaction? RPP? Time will tell.

Author: VIG/C-QUADRAT TFI