Continued rotation to cyclical companies

W previous monthly comment VIG/C-QUADRAT TFI experts pointed out that companies from semiconductor sector and software, as well as companies from the consumer and financial industries, contributed positively to the growth of indices in developed markets.

Last month, this trend was reinforced by positive readings from the industry. This was particularly visible in the industrial activity indicators, such as ISM and PMI. These data were not very good or good, but they were no worse or only slightly better. This may mean that we are facing a gradual improvement in economic activity.

At the same time, the increase in geopolitical risk (attack on Russian refineries) made it a significant impulse for the entire raw materials sector - from oil, through gold, silver i copper. Increases in the prices of base raw materials had a significant, positive impact on companies from the fuel, raw materials and chemical industries. All the above-mentioned sectors are cyclical.

To sum up, the growing contribution of cyclical sectors to the growth of indices is positive. On the other hand, it should be remembered that too rapid an increase in raw material prices in too short a period of time will not be positive for consumers in the medium term, as it will be reflected in higher prices of products and services.   

Risks?

Relatively high valuations historically, both in the US and Europe. This applies especially to technology and "quality" companies. Additionally, the geopolitical aspect visible in the form of a growing number of conflicts/flashpoints in the world makes it increasingly important in assessing the business prospects of individual sectors and companies.

Domestic shares: Companies are still attractively valued

In terms of valuation, the domestic stock market is slightly above its historical averages. Nevertheless, relative company valuations remain very attractive compared to global stock markets. The main arguments for continued growth remain unchanged - these are Poland's solid macroeconomic foundations for 2024 and the possible inflow of capital to the domestic stock market.

Where are the potential risks?

In the medium term, the future of Ukraine is uncertain. The conflict reaches a stage where no likely outcome is beneficial or satisfactory to both parties involved in the dispute. Unfortunately, this is a key aspect in the perception of risk in our region of the world.

First banks, then developers

Corporate bonds

In March 2024, the value of bond issues amounted to PLN 4,7 billion, which was the best result since November 2023. Much of this was due to banks, which raised a total of almost PLN 4,1 billion - PKO BP issued EUR 500 million, and Santander Bank Polska – PLN 1,9 billion. Companies from other industries obtained PLN 622 million, which is a level very similar to February this year.

Nominally, as much as 86% of the value of non-bank debt was issued by developers. The largest issue was carried out by PHN, which, by obtaining PLN 230 million, significantly improved the liquidity situation 3 quarters before maturing bonds worth over PLN 250 million.

On the market Catalyst prices generally did not fluctuate much, although LPP bonds were an exception. After the report was published by Hindenburg Research, LPP1224 bonds dropped to 97%, while at the end of February the rate was 100,5%. However, the issuer's management successfully convinced investors to its version of events that at the end of March the share price increased to 100%. In March, 7% of the total LPP issue was traded, which has never happened before.

We continue to observe very strong demand for corporate and bank bonds among both institutional and individual investors. The average reduction in enrollment is around 40%, and the highest reduction in March was over 70%. The current market situation undoubtedly favors issuers in placing debt. Banks (in terms of issue value) and developers (in terms of number of issues) are invariably the dominant players on the market.

Treasury bonds

A month of stagnation on the treasury bond market is behind us. After a weak February, March was another month when Treasury bond yields rose (prices fell). However, the high current portfolio profitability fully compensated for the slight increase in the yield of government securities (10Y increase from 5,32% to 5,44%). This situation may raise some surprise among investors, as economic data are very supportive for the debt market. The preliminary inflation reading for March (1,9%) turned out to be significantly below market forecasts (2,2%) and the inflation target (2,5%). Additionally, the inflation rate at such a low level was last seen exactly 5 years ago (in March 2019).

The market is probably already discounting the future rebound in inflation that will take place in the coming months. Return of the VAT rate on food from April, the so-called a low base and the probable end of energy and gas price shields should push the CPI index to a higher level again from July. The core inflation rate, i.e. net of fuel and food prices that are not influenced by monetary policy, seems to be much more crucial in this context. Here we continue to observe the persistence of inflation processes in the Polish economy. This indicator is still well above 4%, which shows that inflationary pressure in the domestic economy remains at an elevated level. We also face the forecasted economic recovery, which will be driven by strongly growing disposable incomes (thanks to low inflation, Poland is experiencing record growth in real wages). In the opinion of VIG/C-QUADRAT TFI experts, such a mixture will be a good basis for the return of volatility to bond markets. In such an environment, an active approach to interest rate risk management will be crucial.

Author VIG/C-QUADRAT TFI