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Summary The political power is in the hands of one party: Law and Justice (PiS). Law and Justice wants to introduce a new bank tax from the beginning of 2016. The Polish stock market would have a problem to get up from its knees since the banks would have to deal with a number of fundamental burdens. Last Sunday, parliamentary elections were held in Poland. The Law and Justice (PiS) party won the elections. The party has a number of seats in the Parliament that guarantee them independent power. It is a good sign for the markets in the short term: investors don’t like uncertainty. Meanwhile, from the day of elections, the markets have been assured that the government will be formed quickly and easily. The State Electoral Commission (PKW) said on Monday that the Law and Justice party have won the general election with 37.58% support. The Civic Platform, which ruled Poland for the last 8 years, garnered as much as 24.09%. KUKIZ’15 (rockstar Pawel Kukiz’s party) came third with 8.81% support. Nowoczesna (popular economist Ryszard Petru’s party) garnered 7.6%, and Polish People’s Party (PSL) managed to get 5.13% support. Official Poland Parliamentary Elections 2015 Results Party % of votes number of seats Law and Justice (PiS) 37.58 236 Civic Platform (PO) 24.09 136 Kukiz’ 15 8.81 42 .Nowoczesna 7.60 28 Polish People’s Party 5.13 17 German minority – 1 Source: Polish State Electoral Commission The Law and Justice is a conservative party in social issues and rather left-winged in economic issues. There was no panic after the elections results were announced. WIG (Warsaw Stock Exchange Broad Market Index) vs. WIG20 (WSE 20 Blue Chips Index) Source: Stooq It is important to notice that Western media is divided in the assessment of Law and Justice’s win. “Poland’s once boringly stable politics are now over” – according to “The Economist” . “National conservatives are not an anti-EU party” – convinces Konrad Schuller from “Frankfurter Allgemeine Zeitung”. The Law and Justice party may also have a bad impact on the banking sector. The party announced the upcoming implementation of new banking tax (0.39% of assets per year). The announcement was supported after the elections . Law and Justice also want a forcible conversion of CHF mortgages into PLN. It can cost Polish banks even up to 16 billion PLN (4.14 billion USD). Meanwhile, the banks have a large share in the WIG20 (35.3%). Polish banks, moreover, for a long time have been dealing with all sorts of fundamental problems and inhibit a new hossa at the Warsaw Stock Exchange, as I wrote a few months ago. WIG vs. WIG-Banki (WSE Banking Sector Index) Source: Stooq Yet another threat related to the new government is forcing healthy energy sector companies to buy unprofitable Polish coal mines. The previous Civic Platform government tried to do that . It’s hard to believe that Law and Justice government will allow coal mines to go bankrupt. The last 12 months were fatal for Polish WSE-listed energy companies. Maybe that’s a sign that these ideas are in the prices now? WIG vs. WIG-Energia (WSE Energy Sector Index) Source: Stooq The outlook of the Polish market from a long-term perspective depends on the Law and Justice’s determination in realization of election promises. Introducing all of the Law and Justice party’s ideas will be a disaster for the state budget. However, some analysts are not afraid of Law and Justice’s era. “We expect responsible policies by PiS if it were in power despite its ambitious promises” – wrote Bank of America Merrill Lynch. It is important to remember about the question mark when it comes to relations between the new government and The Polish Central Bank (NBP). The Law and Justice party wants to stimulate the growth with money from the Polish Central Bank. The bank’s opinion on this matter is not known at the moment; however, it is highly probable that there will be a conflict between the NBP and the Law and Justice government. Even if the Law and Justice’s plan is not implemented, Polish economy will stabilize in the upcoming years with the EU funds (78 bn EUR in 2014-20 period). GDP Annual Growth: Poland vs. EU (click to enlarge) Source: Trading Economics The EU grants could be suspended if the additional state spending pushes the budget deficit above 3% of the annual economic output under the EU’s “excessive deficit procedure”. So let’s analyze the public finance situation in Poland. The budget deficit is at the level of 3% in a period of not-so-bad growth in real economy – this is not a good sign for the future. The debt grows if the deficit is not below 3%, and that makes Polish economy vulnerable and dependent on the global mood. More than a half of the Polish government’s bonds are in foreign investors’ hands. Poland: Government Budget vs. Government Debt To GDP (click to enlarge) Source: Trading Economics The strength of the WSE 20 Blue Chip Index (WIG20) is not bad whatsoever. WIG20 should go up in the upcoming days as investors will forget the propositions of the Law and Justice party. There was a successful defense of important lows (level of 2.000 pts) in September. This fact encourages buying of Polish shares. A few weeks of growth is possible. WIG20 – technical analysis (click to enlarge) Source: Stooq However, in the medium term (months) and immediate longer term (quarters), a consolidation or even a bear market is highly probable. It means that investors with Poland exposure should reduce positions and wait for further Law and Justice’s governing actions. ETFs with large Poland exposure are EPOL , PLND and GUR . 3 ETFs With Biggest Poland Exposure (click to enlarge) Source: ETFdb As we can see in the charts below, EPOL is the strongest from a 5-year perspective; however, the GUR may have the biggest potential for growth in the short term. GUR vs. PLND vs. EPOL – 5 Years (click to enlarge) Source: Google Finance GUR vs. PLND vs. EPOL – 1 Month (click to enlarge) Source: Google Finance Scalper1 News
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