The outlook for Central and Eastern Europe’s largest bourse, the Warsaw Stock Exchange (WSE), is pretty gloomy for the next couple of years, as sluggish growth in Poland and the wider region, together with the risk of populist economic reforms by the country’s new government look set to all take their toll.
The die was cast for 2016 when the chief executive of the WSE resigned at the end of December, less than a month after Poland’s new Law & Justice (PiS) government came to power. Pawel Tamborski, who had run the exchange since July 2014, blamed “political games” for his decision – which was not a huge surprise, as the PiS has spent the months since its return to power placing its people in positions of power.
The chosen successor is Malgorzata Zaleska, a Warsaw School of Economics professor and board member of Poland’s National Bank. To date, Zaleska has revealed little of her plans and she declined a request to be interviewed for this article while the new management finalizes its strategy.
The WSE has come a long way since it opened its doors in 1991, as Poland was still in the beginning of its painful transition from communism to a market economy. It began life in the offices previously occupied by the Central Committee of the Communist Party, a function of the lack of adequate office space in Warsaw at the time – a delicious irony for Poland’s new capitalists.
On the first day of trading, only five shares were listed and turnover amounted to just $2,000. “For many people the creation of the stock market in Poland meant we were finally free to act on our own. This was the day that communist rule was finally over,” says Wieslaw Rozlucki, who co-founded the WSE and ran it until 2006.
The bourse introduced contemporary listing and trading standards, and set the barrier to entry fairly high. As a result, it grew slowly, registering only 15 companies after two years in business. However, during the noughties especially, it exploded to usurp the position of leading stock market in the region from the Vienna bourse. It now has 905 listings and a market capitalisation of €126bn, making it the biggest bourse in CEE, but still well behind Istanbul and Moscow. “On one hand we are a relatively small market compared to London or Frankfurt, but still there is some potential to grow but it will be single digit, maybe low double-digit growth in terms of market capitalisation,” Janczak says. It’s going to be very tough in the next two to three years, both for investors and for the government to prove that its plans are good for the economy in general.”
During the last two years, the previous government failed to acknowledge the WSE’s role in promoting innovation, savings and investment – something the new administration has yet to do either, Rozlucki notes.
While the days of the WSE’s rapid market capitalisation growth are now gone because all of the biggest Polish companies are already listed, both Rozlucki and Janczak argue the new management should focus on attracting smaller companies from the CEE region with interesting stories that can boost long-term investment in the bourse. “If the WSE will not be part of the new national economic development strategy, then I think the exchange risks being marginalised,” Rozlucki says.
“If the reason for underperformance is both the fundamentals and market sentiment, it’s much easier to improve sentiment than the fundamentals,” he adds.
Certainly, investor sentiment has taken a hit recently. When it became apparent that the conservative PiS would likely win last October’s parliamentary elections, the WSE’s main index began to slide, falling 18% since June last year.
Investors were concerned about how a new PiS government would finance its campaign promises of increased child benefit, free medicines for the elderly, lowering the retirement age, and new taxes on banks and retailers, and began to sell off Polish stocks. The market capitalisation of listed domestic companies fell 16% last year to PLN517bn, meaning that since June last year Poland’s equity and currency markets have been the worst performers in CEE. That said, the bourse is pretty well run, launching 33 IPOs last year – the third highest in Europe – while increasing net profit by 10% year on year to PLN124mn.
The negative sentiment was driven by two main factors – a plan to bail out the country’s almost bankrupt coal miners with cash from the state-controlled utilities, which was first floated by the previous government; and the new taxes on banks and retailers. Banks and utilities make up 46% of the WSE’s most liquid index, the WIG 20.
Janczuk sees lots of “negatives” for the WSE as investors wait to see exactly what the impact of the PiS government’s reforms will have on public finances and the economy as a whole. Some reforms, such as increased child benefit could significantly boost consumer spending and lead to growth in Polish retail stocks. “The valuation of Polish stocks took a massive hit last year, so I would say that a lot of negative expectation for them is already priced in, so maybe we should wait for positive surprises in terms of WSE’s earnings,” he says.
Janczak said public finances should be stable this year because of the PLN4bn-5bn from the bank tax, but 2017 is more uncertain especially because of the government’s promise to give Polish families PLN500 per month for each child after their first.
For new CEO Zaleska, one of her main challenges will be to mitigate the possible negative effects from the government’s forthcoming pension reforms.
The WSE became a regional player partly thanks to local pension funds investing heavily in Polish equities, which boosted market capitalisation, listings and global investor interest. Despite pension reforms introduced by the previous government, these local funds still hold PLN108bn (€25bn) in equities, making them one of the WSE’s biggest investors.
But that reform has seen the funds moving from being net buyers of equities to net sellers and any further moves to gradually liquidate pension funds will mean the WSE will have to find new investors to take on the assets the pension funds sell, says Janczuk. “I think she will be interested in focusing on the local market, increasing interest from individual investors, further building liquidity and perhaps introducing new instruments,” he says.
“But I believe the most important market for the WSE will continue to be the equity market and that is a very cyclical business,” Janczak says.