Polish Stocks Count $50 Billion Cost One Year After Duda Win

  • Benchmark WIG20 Index falls most worldwide this quarter
  • Banks hurt from new tax to fuel social spending: NN Investment

Twelve months on from Andrzej Duda’s surprise initial victory in Poland’s presidential elections, stock investors are fleeing the country. And there’s little sign they will come back any time soon.

The benchmark WIG20 Index has suffered the worst losses worldwide this quarter among 93 gauges tracked by Bloomberg in dollar terms, exacerbating a rout that’s wiped $50 billion off Poland’s market capitalization since Duda triumphed in the first round of voting on May 10 last year. NN Investment Partners and Blackfriars Asset Management Ltd. say the declines will continue unless the Law & Justice government changes course.

“Poland is a clear short," said Nathan Griffiths, a senior emerging-market equities manager who helps oversee $1.1 billion at NN Investment in The Hague and has held fewer Polish stocks than benchmarks suggest for at least a year. "The reality is that the WIG20 is worth a lot less today than a year ago simply because of the Law & Justice party."

The slide in stock values is testament to the deterioration of confidence in a market once regarded as a haven among developing economies. The Law & Justice party from which Duda hails took over the government in October, giving it free rein to impose a bank tax that’s set to erode industry profits, while also adopting measures to encroach on institutions like the country’s top court, prompting Poland’s first-ever credit downgrade in January.

Bank Tax

The average short interest for companies on the WIG20 rose to 1.2 percent on Wednesday from 1.1 percent in December, according to Markit Ltd. data. That compares with 3 percent or more for the Stoxx Europe 600 Index and S&P 500 Index.

Banking shares have borne the brunt of investor bearishness as the government saddled lenders with a annual levy of 0.44 percent of assets from Feb. 1, the highest in the European Union, according to Oxford Economics. Analysts slashed their earnings projections for Polish stocks by 14 percent from last year’s peak in August on speculation Law & Justice would replace the Civic Platform after October elections and boost social spending at the expense of banks.

The 15-member WIG Banking Index fell 11 percent this quarter, three times the pace of declines in the MSCI Emerging Markets Financials Index and compared with a drop of 9 percent for the Polish benchmark. The WIG20 rose 0.6 percent by 1:51 p.m. in Warsaw, trimming a weekly retreat.

"It’s hard to see the situation improving much from here as all this is the result of Law & Justice policies," said Anastasia Levashova, a money manager at Blackfriars, which holds Polish stocks in several funds.

The caveat, she said, would be if the state takes a "more constructive stance towards banks," to allow them to resume lending and thereby make it less likely that Moody’s Investors Service and Fitch Ratings would follow S&P Global Ratings with credit downgrades. S&P shocked markets in January by cutting the sovereign one level to BBB+, its third-lowest investment grade, with a negative outlook.

"That would mean that main risks didn’t materialize, and with decent growth Poland looks good within the European Union," she said. Economists surveyed by Bloomberg project Poland’s economy will expand 3.6 percent this year, the highest after Ireland and Romania in the 28-nation bloc.

Whether the president proceeds with a plan to force banks to convert Swiss franc household mortgages into the zloty will be crucial to determining the country’s ratings outlook, Citigroup Inc. economists Piotr Kalisz and Cezary Chrapek said in an e-mailed note on May 5. They expect Moody’s will leave Poland at A2 at its next review on Friday, while lowering the outlook to negative.

There were some signs this month that Duda may consider abandoning the plan, which the central bank estimated in February would cost banks 44 billion zloty ($11 billion), or about four years of profit. Aside from political risks, Polish stocks have also been under pressure since a pension overhaul in 2014 reduced the presence of state funds in the nation’s equities.

For Griffiths of NN Investment, there are too many risks to justify boosting holdings in Polish stocks, which are still more expensive than emerging-market peers even after the rout in the past 12 months. Lenders in the country trade at 12.8 times projected 12-month earnings, compared with 8.1 times for peers on the MSCI Emerging Markets Index. The multiple for Polish shoemaker CCC SA, whose shares are up 5.7 percent this quarter, is 23.

"I struggle to find any stocks that offer value as the market was always expensive," Griffiths said. "With the banks no longer meriting a premium valuation, investors have crowded into a few consumer names which now trade at very unappealing valuation."

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