Jan Cienski in Warsaw -
The Warsaw Stock Exchange was one of the world's worst performers this winter when the global economic crisis was laying waste to emerging markets worldwide and hitting Central and Eastern Europe particularly hard. But that didn't stop Lindsay Cooper and Damian Bird, representatives of Singapore-based Arisaig Partners, from travelling to Warsaw a few months ago to check out the investment prospects for Poland.
"We are a small fund essentially focused on consumer goods companies, but we think there is an awful lot of growth potential in markets like these," says Cooper. "You can't call yourself an emerging markets fund without Central and Eastern Europe, and Poland is the lynchpin of that."
They are not alone. After its depth-plumbing lows six months ago, the Warsaw Stock Exchange's blue-chip WIG20 index has jumped almost 60%, and those kinds of returns are making both domestic and foreign funds sit up and take notice. As risk aversion fades, funds are becoming more concerned about making profits again and not simply preventing losses. "We're seeing foreign investors start to come back," says Annie Krasinska, an analyst with Wood & Company, a Prague-based brokerage with a large presence in Warsaw. "In the early stages of the recovery in March and April, investors were mostly moving into blue chips because they had cash burning a hole in their pockets, but they were most concerned about being in fairly liquid investments. Now, as the recovery continues, we're seeing them beginning to move into mid-caps as well."
Morgan Stanley, the US investment bank, recently upgraded its assessment of the WSE, noting that the bourse had good prospects because it had rebounded less than other developing markets, and added that the overall condition of the Polish economy - which looks to be one of the only EU countries to avoid a recession this year - made Polish stocks a decent investment.
The Warsaw Stock Exchange has cemented its position as a regional leader during the crisis, overtaking its rival in Vienna in terms of trading volumes and market capitalisation - with trading in the first seven months of the year coming in at about €2bn more than in Vienna. "We have been the first in the region to come out of the crisis," Ludwik Sobolewski, the head of the WSE, told the Rzeczpospolita newspaper in a recent interview. "From February and March of this year, we have been the fastest exchange in the region to make up the previous falls, which took place in 2008. No more bad things will happen to us, under the condition that there is no unexpected black news from the world economy."
The backbone of the Warsaw exchange are domestic pension funds, which can only invest 5% of their assets outside of the country - something for which Poland is being investigated by the European Commission. The funds, which are part of the reformed pension system, can invest a maximum of 40% of their assets in stocks. During the depths of the crisis, they had limited their stock holdings to only about 22% of their portfolios, but as the market has revived they are jumping back in, hoping to make up for last year's lacklustre results - where they lost PLN1.4bn (€340m). The funds have a guaranteed source of income from Polish workers - raking in PLN20.5bn last year - for a combined total of PLN139bn in assets.
The crisis also prompted many clients to bail out of investment funds. From the end of the bull market in October 2007, funds saw clients pull out more than PLN31bn as they sought to protect themselves from the downturn. The recovery has been halting - with the three months to July seeing an inflow of funds - although the scale of the revival is still small, with a total of PLN1.3bn in inflows over those three months.
Private equity funds are also showing some signs of recovery. In 2008, private equity and venture capital funds invested €628m, only 8% less than in record-breaking 2007, but it proved to be a lot more difficult to attract new investors. The funds acquired €2.5bn in funds for new investments in 2008, about 40% less than had flowed in a year earlier.
However, the private equity market is beginning to revive, according to new study by Deloitte, the accounting and advisory firm. In a survey of funds active in the region, Deloitte found that only 19% of private equity fund managers expected a continued falling market (compared to 80% six months ago), with 65% expecting the next half year to be relatively stable. Almost half the respondents said they were looking for new deals.
Although funds have amassed more than €4bn to spend in Central Europe, they invested only about €100m in the last half year, says Oliver Murphy of Deloitte, adding that the increase in optimism shows the market is at or near bottom, and that the expected recovery is near.
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