The boom on the stock exchanges of Western Europe and the USA is still bypassing the Warsaw stock market

The Polish stock market is still vulnerable to flows of short-term foreign capital. This means that the situation on the Warsaw Stock Exchange (WSE) can change quickly. Also domestic investors are able to liven up the WSE, as can be seen especially during initial public offerings (IPOs). They attract numerous investors who sell shares on the day of the début.

”Poland is still perceived as an emerging market. This means we are in the second or third place when it comes to priority of investing funds on the stock exchange. Meanwhile, in the event of any political turmoil, this money leaves this market sooner rather than later. I’m talking here about foreign investors, who currently probably constitute 40%, or even perhaps around 50% of the entire share of equity investments on the organized market,” assesses Marcin Duszyński, President of the Management Board of Capital One Advisers, in an interview with the information agency Newseria Biznes.

As a result, the Polish capital market is not yet as stable as the mature markets of Western Europe and the USA. At the same time, there is quite a strange situation, because, on the one hand, short-term foreign capital can destabilize the Polish market, while on the other, the same capital invests mainly in blue chips, namely the largest companies on the WSE, for fear of risk.

“We are talking about such entities as KGHM and PKN Orlen. This is due to the fact that the allocation of the funds which the investors have are inherently destined for large entities. They are also afraid of price increases, drops and instability – they believe that larger entities, firstly, are more financially stable and, secondly, guarantee adequate liquidity, which, in situations of uncertainty, is crucial and, therefore, they invest in precisely such companies,” believes Duszyński.

In the case of some of the large companies, the factor discouraging foreign investors may be the policy of the majority shareholder, namely the State Treasury. The prime example is PGE’s investment in Opole, which the government forced through, probably contrary to the interests of the shareholders, because the analyses ordered by the company did not demonstrate that it was advisable. Other than the ownership structure, investors also need to take into account regulatory risk which is present in some industries, for example, energy and commodities. However, funds operating on an international scale are able to diversify such a specific, local risk without simultaneously giving up specialization.

“There are companies which invest, for example, in energy or derivatives of energy, so it is obvious that a company will more willingly invest in PKN Orlen as a distributor of these energy media and less willingly in KGHM. In turn, there are those which invest in commodities, and it is obvious that they will primarily invest in KGHM, while PKN Orlen may be in second place,” believes the President of Capital One Advisers.

In contrast to Polish bonds, no large inflow of foreign capital to the WSE can be seen so far. The value of the WIG20 index is almost at the same level as a year ago. During the same period, the American S&P 500 and the German DAX have been breaking successive record levels. Stagnation can also be seen on the primary market since December, especially in terms of the size of initial public offerings. PKP Cargo and Energa were floated on the stock exchange in the last quarter of 2013 and were the last of such big débuts, which were able to interest foreign capital.

In the past, débuts of companies on the WSE (in particular companies under the control of the State Treasury) attracted a large amount of capital to the stock exchange from both institutional and individual investors. Large increases in stock prices in the case of some IPOs encouraged an increasing number of small investors to speculate in the short-term. The view became popular that a début which does not end with high growth is a failed début.

“There is too great an attachment to this price and this moment in Poland. In fact, this is just a very unimportant part of the whole of the company’s history. What happens after the début is what matters, and that is most important. A successful début usually means that there is some increase in the price with respect to the purchase price, or the subscription for the shares before the début. This is pure speculation. There are no rules here,” believes Duszyński.

Therefore a début on a regulated market is not an end in itself, only a method of increasing development opportunities in the medium and longer term. On the one hand, the capital market makes it easier for a public company to obtain funding through a share or bond issue, while, on the other hand, it closely watches the results and decisions of the management board.

According to Marcin Duszyński, after the debut, the company should generate better revenues and profits than the forecasts presented in the prospectus.

“This is our principle, because then we have a guarantee that the confidence which investors initially have in the company, which despite everything, however is limited, will be maintained and developed because the company will prove to the public market that it keeps its promises and that the company is actually growing,” he explains.

Source: NEWSERIA