New sheen to Polish stock market

By bne IntelliNews November 19, 2009

Jan Cienski in Warsaw -

Toward the end of 2009, the Warsaw Stock Exchange has become one of the most exciting bourses in Europe after the first months of this year saw it suffering one of the worst performances in the world.

The latest fillip to the exchange was the heavily oversubscribed IPO of PGE, the country's largest utility. The IPO, the largest in Europe so far this year, raised PLN6bn (€1.4bn) for the company, which it plans to use to begin upgrading Poland's creaking power infrastructure.

The positive response to the listing shows that risk appetite is returning to the region, after investors fled emerging markets in the early months of the global economic crisis. "There was no crisis in Poland, but the capital market was very strongly affected by what happened in the rest of the world," Ludwik Sobolewski, the WSE's president, tells bne.

The broader market began to rebound in February, when it had become clear that Poland and the rest of Central Europe would probably avoid an economic catastrophe and that the banking system wasn't about to crumble. Since its low point, the broad WIG index has risen by more than 80%, although now there is a general sense that the steep upward trajectory may have petered out. "The level of risk is growing," says Maciej Radziwill, CEO of Trakcja Polska, a transportation company that had its IPO last year.

Big fish

Sobolewski has long been an enthusiastic advocate of growing the WSE through IPOs, and Warsaw has traditionally had one of the highest levels of new listings among European exchanges. However, most of those new companies have been tiddlers, unsupported by analyst research and thinly traded. The state-owned PGE debut is very different, allowing both retail and institutional investors to hold shares in a major Central European enterprise.

And PGE won't be the last big new listing on the exchange, thanks in large part to the government's budgetary troubles. Because of a growing deficit and fears the levels of public debt will pass 55% of GDP, triggering legally mandated spending restrictions, the government has embarked on an ambitious privatisation programme, which aims to raise PLN37bn in 2009 and 2010.

The first large government IPO in 2009 was in June by Bodganka, a coal mine in the east of the country, which won East Capital's "Best IPO" of the year. There were worries about investor interest, but it proved to be high enough to reassure the treasury ministry that the privatisation programme was achievable. "Our plan is realistic and we will accomplish it over the next 18 months if the situation in the market is no worse than today," says Aleksander Grad, the treasury minister.

By next year, the stock exchange should see new listings by PZU, the region's largest insurance company, which last month was finally freed of the long-running dispute between its main shareholders, the Polish treasury and Eureko, a Dutch insurance company which owns a third of PZU. Another IPO will come from Tauron, Poland's second largest power generator. "There were some second thoughts about the IPO during the early days of the crisis, but now the strategy has been reaffirmed," says Pawel Gniadek, a Tauron spokesman.

In all, the treasury is selling about 670 companies, although it will retain a majority or at least a controlling stake in many of the strategic ones such as energy companies. One that will be sold entirely is the WSE itself, which received a binding offer for an undisclosed sum in November from Frankfurt's Deutsche Boerse.

In addition to the privatisations, two local banks, PKO Bank Polski and Portugal's Millennium, have both announced share issues to beef up their balance sheets, and more banks are planning similar steps.

As the market calms, Sobolewski says it is returning to a more traditional structure. During the depths of the crisis, individual investors accounted for only 18% of market turnover, while in the first half of this year they were back to about 28%.

Institutional investors are also returning. Mutual funds have had seven months of increases in funds under management, after a panicky period last year when investors withdrew about half their money. Poland's private pension funds, part of a reformed pension system, are also more interested in stocks. By law they can have a maximum of 40% of their assets in stocks, but during the crisis that had fallen to below 20%, but now is closer to 30%.

The pension funds, which have about PLN170bn under management, have been a pillar for the WSE, regularly pouring immense sums into the market, which has given Polish shares some of the highest valuations in the region. The finance ministry had proposed slashing the amount of money that automatically flows from workers salaries into the funds and instead divert the money to the state pension system as a way of reducing strain on the budget, which was causing worries that it would precipitate a big fall in the market. However, the PM's chief advisor, Michal Boni, said in an interview for TVN24 on November in mid-November, that this change wasn't on the cards anymore. "We'll have to find a solution, a solution that won't frighten anyone," Boni said.

Ryszard Petru, chief economist for Poland's BRE Bank, is glad, describing the proposal as "a very bad idea."

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