The immediate fate of the stock market depends on the policy of central banks

The situation in the global stock market is invariably influenced by the policy of leading central banks. According to VIG / C-QUADRAT TFI experts, the fight against inflation has become a priority for the American bank Federal Reserve (Fed) - even at the cost of economic growth and employment. This is a negative scenario for the stock market, especially for companies sensitive to interest rate increases.  

Increase in interest rates is already contributing to the decline in activity in the real estate, industry and services sectors. The next phase is the decline in forecast profits. This, in turn, should translate into a decline in employment, i.e. an increase in unemployment. This is likely to reduce the inflationary impulse.

Investor sentiment remains mixed and uncertainty remains high. Investors seem reluctant to accept that the outlook for stocks has deteriorated significantly. This is evidenced by the valuation of US stocks, which are still relatively expensive historically. 

European stocks are influenced by geopolitics - Russia, after an effective energy blackmail (which led to a crisis in the region's energy market), is holding express referendums on the occupied territories of Ukraine to include them in the Russian Federation. Additionally, a partial mobilization has been introduced in the country, which means that the conflict is heading towards further aggravation.

In this environment, VIG / C-QUADRAT TFI experts believe that it is worth noting the slightly higher level of cash in the portfolio and investment opportunitiesthat appeared in Europe in connection with Russia's gas blackmail. 

Domestic market - shares

The situation on the domestic stock market is invariably influenced by the geopolitical situation in the region. Price and availability natural gas, oil whether carbon is a key issue. The escalation of the conflict by Russia is not conducive to taking excessive risks. The market sentiment is so bad that we appear to be oversold.

What's next? After record declines in 2022, we can say that sentiment to the stock market is bad, short-term business prospects are difficult and valuations are record low. However, despite the tough environment, we believe that a gradual increase in stock allocations at such low valuations is reasonable over the medium-term investment horizon.

Corporate bonds

September did not bring any revival on the market corporate bonds. The prices of corporate debt on Catalyst fluctuated around August lows, which, given the discounted quotations and the approaching maturities, translates into an increase in profitability. Bonds issued by the best quality issuers from the financial industry offer a profitability of around 10%. annually. Bank Gospodarstwa Krajowego offered a slightly lower profitability at the auction on September 21, during which investors could purchase 10-year bonds guaranteed by the Treasury with an expected yield of 9,3%. annually. With very high yields offered by BGK and good quality issuers from the financial sector, it is difficult to make a big move on the primary market, especially since institutional investors have recently faced a wave of redemptions. In September, several bond issues appeared, which were addressed to individual investors or dedicated to specific institutions. However, their volume was not impressive. 

In summary, the market is at a time when financing costs are very high and buyers are free to choose from in the secondary market. Therefore, VIG / C-QUADRAT TFI experts expect further apathy on the primary market and opportunities on the secondary market.

Treasury bonds

The last three months perfectly illustrate the situation on the fixed-rate government debt market. In June, Polish 10-year bonds reached the level of 8,16%, to return to 5,36% at the beginning of August (yield drop by 2,8 percentage points!). Obviously, this resulted in dynamic increases in debt funds (some products experienced double-digit positive returns in this period). However, the situation has been reversed since mid-August and the yields of treasury instruments are heading north again, and the gains only accelerated in September (the current level of 10Y - 7,32%). To sum up - the situation on the bond market is changing like in a kaleidoscope. In the opinion of VIG / C-QUADRAT TFI experts, the past quarter probably illustrates well what awaits us in the coming months on the domestic debt market. There will be no shortage of volatility. 

What is driving this high volatility? Debt markets are still in a period of high uncertainty about the future path of inflation and economic growth. Stagflation is fast approaching Poland. This means a period of high inflation accompanied by low economic growth. In case of a slowdown, we no longer have uncertainty. Recent Leading Indicator Readings (PMI, Industrial Orders) and GDP dynamics for the second quarter (-2,1% q / q) indicate a marked slowdown in the Polish economy. It is highly probable that at the beginning of next year, the GDP dynamics will approach zero or even record negative readings. At first glance, such a scenario should strongly support the government bond market.

However, we also have the other side of the coin. Inflation not only does not want to fall, but so far there are no signs of its stabilization at a higher level (the last CPI reading - 17,2% - surprised  analysts negatively). Until investors become convinced that the CPI index is permanently declining, it will be hard to find a strong and lasting boom in the government debt market. Unfortunately, the outlook for inflation does not look good. Ahead of us is the winter period, which brings with it a lot of risks for higher inflation (availability of gas and energy), and we are entering the pre-election period, which in Poland is characterized by increased social transfers, which will not support a rapid decline in the CPI index. In addition, major central banks (the American Fed and European Central Bank) changed the narrative to a more hawkish, which triggered a sell-off of bonds in the core markets. As a consequence, higher yields on the US and German securities markets made the attractiveness of domestic instruments lowered.

We also have "a tablespoon of honey in this barrel of tar." Yields of Polish bonds are approaching the levels from June again, which, given the communication from the MPC about the approaching end of the interest rate increase cycle, should strongly support the stabilization of the domestic treasury securities market. In addition, by following the last so-called "Fed dots" (Fed members' expectations about the target level of interest rates) it seems that the global debt markets have already discounted the majority of the interest rate hike cycle by the largest central bank, which should also take the pressure off the local bond market. Moreover, the situation from the last quarter clearly shows that the financial markets are so dynamic that while waiting for an opportunity…. we may not catch it in time.