19 September 2014 | 24 pages 110 Negative emotions in the … · 2017-05-19 · Investment Barometer 19 September 2014 6 Chart – Manufacturing PMI since 2012 Source: Bloomberg,

September 2014

19 September 2014 | 24 pages

Negative emotions in the markets have subsided Market Outlook of the Investment Advisory Bureau

Jacek Janiuk, CIIA

Investment Advisor

Jakub Wojciechowski

Securities Broker

Contributing authors:

Karol Matczak

Maciej Pietraszkiewicz

Dariusz Zalewski

Jarosław Przybył

Michał Wasilewski

Source: Bloomberg, Citi Handlowy

80

90

100

110

120

130

Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14

WIG30 S&P500 Eurostoxx50

97

100

103

106

109

Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14

Polish Treasuries US Treasuries

German Treasuries

August brought some calm to most global equity and debt markets, finally allowing Warsaw

Stock Exchange investors to make some profit after the first half of the year, which was not very

promising. The main driver were further signals that the worldwide economic situation was

improving (including higher Chinese PMI, rapid Q2 GDP growth in the United States,

acceleration in global trade) while valuations of assets remained attractive.

In the improving environment, the performance of equity indices has hardly been surprising.

The largest equity market gains were reported in the United States (with S&P 500 up by 3.8% in

August) and in Latin America (with the MSCI EM LatAm up by as much as 7.8%). The Polish

market also performed very well against many other markets in August, gaining 3.7% (the WIG

broad market index), with blue chips acting as the main growth driver (the WIG30 was up 3.7%).

Small caps disappointed once again with the WIG250 losing 0.8% in the previous month. Asian

markets fared slightly worse. The Japanese Topix slid by 0.9% in August while the Chinese

Hang Seng closed marginally down, losing 0.1%.

Despite the geopolitical turbulences, we maintain our positive view on equities vs. bonds.

We believe that the fundamental situation has not changed so much as to justify the

modification of our view at the level of asset classes. The following factors support equities: the

improvement in global macroeconomic conditions (we expect the global GDP to rise by 2.9%),

the expected growth in corporate earnings signaled by leading indicators, expansive monetary

policy by the Fed, ECB and BoJ as well as positive sentiment among investors reflected in

inflows to equity funds.

At the moment, the greatest risk factor to our scenario remains the manner in which the

global geopolitical situation develops. The three flashpoints that we mentioned in the August

barometer (the conflict of Ukraine and the West with Russia, the progress of Islamic

fundamentalists in Iraq and the hostilities between Israel and Hamas) are still far from being

solved, and the first two of them appear to be exacerbating.

Our attitude to the Polish equity market has improved and we have changed our asset

allocation from negative to neutral. The main risk factor present in the first half of the year (the

number of people choosing open-ended pension funds) no longer worries investors and

decreases in prices across the board have made many stocks more attractive. Nevertheless, the

Polish stock market may still be weighed down by the conflict beyond our eastern border and by

the economic sanctions being imposed. Economic data have not provided much support recently

either, since they point to the softening of economic activity in Poland in the second quarter.

We maintain our negative outlook on the debt instrument market relative to the equity

market. Equity valuations look more attractive than those of bonds. Yields of many bonds are

now at historic lows or near them.

As concerns Polish bonds, we have noted that the recent weaker economic data and low

inflation readings increase the likelihood that interest rates will be cut.

Investment Barometer 19 September 2014

2

Poland

In early August, new economic sanctions were introduced. In response to the

restrictions imposed by the EU in July, Russia placed an embargo on food products from

the EU, U.S., Canada and Australia. Currently, no fruit, vegetables, meat, poultry, dairy

products or fish can be exported to Russia. The effects will be felt in Poland as well. The

Russian embargo may adversely affect both the Polish food and transport industries.

Moreover, the sanctions will directly result in an increased supply of the products

concerned in the domestic market and thus we can expect prices to come under

pressure, which will in turn affect CPI inflation readings. Instead of dying down, the

conflict in the East is gaining momentum.

Despite the persistent tension, in the equity markets August was a month when the

July correction caused by geopolitical events was reversed . Stock exchanges in the

United States, in Western Europe and in emerging markets rose in harmony. Equity

markets in the United States were “extremely stable” during the nervous month of July,

and in August they quickly recovered from losses, with the S&P500 climbing to new

heights and beating the psychological level of 2,000 points. Western Europe also

recorded a strong rebound with such indices as the Eurostoxx 50, Stoxx Europe 600 and

the German DAX going up. The Polish stock exchange also benefited from these

developments. During the month, the WIG rose by 3.7%, successfully defending the

50,000 level for the fourth time this year. We believe that this is an important support

level and it should be closely watched by investors.

Chart – WIG since the early 2011 with the support level marked


The subject of pension funds used to be an additional factor that affected the equity

market. In August, we learned the final number of those who had opted for the second

pension pillar. More than 2,564,000 Poles still wanted a portion of their pension

Calm in the markets

Conflict beyond the eastern

border results in further

sanctions


3

contributions to be invested through open-ended pension funds. This number far

exceeded the initial expectations. Another important issue is the fact that the average

contribution transferred to pension funds almost doubled in August. This confirms that

open-ended pension funds have been chosen by the more affluent, which is good news

for our stock market. In addition, the Polish Financial Supervision Authority has issued a

new recommendation on the classification of foreign investments by pension funds. In

accordance with the PFSA recommendation, it will be the currency in which the shares

are denominated that determines whether they constitute foreign investment (previously

it was the listing venue). This recommendation caused the share of foreign investments

to come close to the 10% ceiling (the upper limit of exposure to foreign investments in

2014 is 10%, while in 2015 the limit will be increased to 20%). Consequently, there has

been a significant improvement in the open-ended pension fund managers’ sentiment

towards Polish equities. In July, pension funds again became buyers on the WSE.

Obviously, the role of these funds on the Polish stock exchange has been marginalized

anyway, but the positive aspect here is that they will not drive supply in the near fu ture

and that is what the market feared.

Since the beginning of the year, we have seen a large gap between the performance of

Polish large caps and that of the small- and medium-cap index. Several factors played a

role here. On the one hand, there was considerable uncertainty associated with the

possible supply of shares from open-ended pension funds and the absence of inflows

into Polish equity funds, and on the other hand small caps had performed better and

thus had attained higher valuations in the previous year and as a result the slump in

their prices this year was more pronounced. Demand for small and medium caps is

mainly driven by investment funds and individual investors. This segment should be

closely watched right now, since such gaps tend to result in changes in the long term.

Flows into Polish equity funds are the factor that could indicate the reversal of this

trend. If demand for Polish equities is boosted, it is precisely the small - and medium-cap

segment with its relatively low valuations that should gain the most.

Chart – Performance of Polish stock indices (WIG30, WIG50 and WIG250) in

year-to-date terms


Open-ended pension

funds have been

temporarily eliminated as

a risk factor

Blue chips still

outperform small and

medium caps


4

Attention should also be paid to recent developments in individual developing markets,

which are discussed in more detail in the section of the Barometer dedicated to

emerging markets. Foreign investors have started once again to selectively buy equities

from the relatively undervalued emerging markets. This could be a good omen for

Polish equities in the near future.

Chart – Performance of the WIG and MSCI EM since early 2014


Given the relatively attractive valuations of the Polish companies listed on the WSE,

deep slumps in the small- and medium-cap segment year to date, the underperformance

of the WIG relative to the emerging markets index year to date and a surprise on the

upside regarding the number of people who decided to remain with open-ended pension

funds, we have decided to change our outlook on Polish equities from negative to

neutral.

The geopolitical situation remains a risk factor for Polish equities. Owing to the

proximity of the conflict and our economic ties with Eastern partners, Poland is very

much exposed should the conflict exacerbate. Additionally, foreign investors pay a lot of

attention to the geopolitical situation. Recently, we have observed a slight depreciation

of the PLN and the EUR against the USD.

Better outlook for Polish

stocks

Geopolitics remains the main

risk factor


5

Chart – USD/PLN and EUR/PLN exchange rates since 2010


Another risk factor stems from Poland’s internal economic situation; macroeconomic

readings from the last month are far from optimistic. In August, a large proportion of

macro data were below market expectations: the industrial production reading rose by

2.3% (with the analysts’ expectations at 2.6%); the GDP reading for Q2 rose by 3.3%

(vs. expectations of 3.4%); the July increase in average wage was 3.5% (growth of 4.2%

was expected); CPI inflation decreased by 0.2% (a decrease of 0.1% was expected);

unemployment rate stood at 11.9% (vs. expectations of 11.7%). Manufacturing PMI also

surprised on the downside, steadily decreasing from the February peak of 55.9. This

time, the manufacturing PMI fell below the 50 point threshold that separates economic

growth from slowdown. The August PMI came to 48.5. PMI is one of the key leading

indicators. Given its current reading as well as the disappointing levels of the remaining

macroeconomic indicators, we should expect an economic slowdown in the second half

of the year. Therefore we have revised our GDP growth forecasts for Poland. Citi

economists estimate that GDP growth in Q3 will drop below 3% y/y, while in Q4 we will

return to the growth path, which should translate into a GDP reading at a level of about

3.1% y/y for the entire year. In 2015, the economy – buoyed by the improving labor

market conditions and low interest rates – should continue to accelerate to the level of

3.5% y/y.

Macroeconomic data as

another risk factor


6

Chart – Manufacturing PMI since 2012


August was another good month for Polish government debt. Polish bonds gained

and the yield on 10-year Treasuries fell to around 3.1%. Favorable sentiment in the debt

market was grounded both in the performance of Treasury bonds in eurozone countries

(new lows were recorded for yields on 10-year bonds: German Bunds dropped to 0.9%,

with Spanish and Italian bonds at 2.14% and 2.36%, respectively), and in the

macroeconomic data coming from the Polish economy. For the first time in Poland’s

history, inflation fell below zero with the July CPI inflation reading at -0.2%. It should be

mentioned that analysts expected the July CPI reading to be at -0.1% so the decrease

in prices was deeper than expected. In view of the current sanctions, the low average

price level could be maintained for a long time. This, together wi th the worse-than-

expected macroeconomic readings, may provide an argument for the Monetary Policy

Council to cut interest rates. The FRA market has already priced in a cut in interest

rates. In such circumstances, a likely scenario is a cut in interest ra tes unless economic

data in the coming months surprise considerably on the upside.

Chart – CPI inflation against the NBP benchmark rate


Debt market still going up


7

Despite the recent geopolitical events, we still believe equities to be more attractive

than bonds. In Poland, low inflation combined with sentiment towards emerging market

bonds and the limited supply of bonds affected bond prices. We think that sentiment

towards the Polish debt market is positive and may remain so for some time. The rally in

the debt market has reached an advanced stage. Prices of Polish bonds have been

rising for four years; at the end of 2010, the yield on 10-year Polish Treasuries was

around 6% and now it stands at 3.1%. Inflation, on the other hand, is cyclical, so in the

long term the improving economic situation in Poland should eventually drive it up. This

scenario will obviously have an impact on monetary policy and on Treasury bond prices.

Today, however, owing to short-term factors that support bond prices, we remain neutral

towards the short vs. the long end of the yield curve.

Chart – 10-year Polish government bond yields since 2010


An additional risk factor for the Polish debt market is the current high share of foreign

investors, which has recently exceeded 42%. It is well known that foreign investors are

very sensitive to the sentiment prevailing in the markets and where this reverses , a sell-

off and a jump in the yield of Polish bonds could follow.

Investing in bonds carries

increasing risk


8

United States

After a wave of sell-offs in late July and in early August, the main stock exchange

indices in New York started to recover lost ground very quickly. Risk aversion in

global equity markets related to the conflict between Russia and Ukraine became the

main factor behind the long-awaited correction. Surprisingly, however, the fact that the

S&P 500 dropped by a few percent was considered an opportunity to buy and only

encouraged investors to increase their exposure to the stock market. Already at the end

of August, we witnessed the S&P500 scale new highs, exceeding 2,000 points for the

first time in history. The return on the S&P500 broad market index for the entire month

was a whopping 3.8%. The index level in the second half of 2015 predicted by Citi

analysts is 2,050 points, so the growth potential appears very limited in the light of this

forecast.

Chart – Performance of the S&P500 against the EURO STOXX 50 in August


The data reported from the U.S. economy in recent weeks have been very solid. The

soft Q1 GDP reading, which was probably indeed the result of harsh winter, did not

prove a harbinger of worse news from the United States. According to the latest data, in

Q2 the GDP increased by 4.2% q/q and thus the rebound in the U.S. economy has been

stronger than originally expected. The investors’ mood at the beginning of the month

was improved by the (significantly better than predicted) ISM services reading, which

rose to 58.7 points, i.e. the highest level since 2005.

New highs in New York


9

Chart – ISM for the services sector in the United States


An important event watched by American investors was the conference in Jackson Hole.

Janet Yellen’s statement disappointed the market a little, since observers probably

expected some more specific information on the future direction of U.S. monetary policy .

The Chair of the Federal Reserve drew attention to the data that will be published in the

coming months since these will have a significant impact on the Fed’s moves. Better -

than-expected labor market information may result in tighter monetary policy. On the

other hand, deterioration in the readings will probably result in postponing the first rate

increase.

Meanwhile, the labor market remains in good shape. The unemployment rate in July

was 6.2%. However, it is still above the long-term average, which is 5.83% (calculated

for the period from 1948 to 2014). Other labor market figures such as initial jobless

claims or non-farm payrolls also remain optimistic.

Chart – Unemployment rate in the United States


4%

5%

6%

7%

8%

9%

10%

11%

Solid labor market data


10

Higher-than-expected inflation might also result in faster monetary policy tightening and

therefore investors are closely watching the movements in general price levels. In July,

annual inflation slowed down to 2% compared to 2.1% a month earlier and so the risk

of interest rate increases in the near future appears remote . Citi analysts expect the

Fed to start raising interest rates in Q3 2015 at the earliest.

In recent weeks, the U.S. investors’ attention also focused on reported corporate

performance. The earnings season may be considered a good one, with sales figures

exceeding expectations by 1.53% and profits of 5.08% above the market consensus.

Despite these upbeat data the U.S. market appears to be relatively expensive compared

to other developed markets. The price to earnings (P/E) ratio for U.S. stocks, which

stands at 17.2, does not encourage investors to buy the securities traded on Wall

Street. Companies have very strong fundamentals, but it will be important to maintain

the profit growth rate since only this can provide fuel for further growth.Given the above,

we see moderate potential in the U.S. stock market. On the other hand, there are no

local risk factors that could slow down the accelerating economy.

No increases in interest

rates by the Fed should

be expected yet


11

Developed Europe

After a wave of sell-offs that swept developed markets in July, August was a good

month in terms of rates of return. The Eurostoxx 50 ended the month 1.8% in the

black while the Eurostoxx600 brought investors gains of 1.88%. The Paris stock

exchange (CAC 40) stood out, yielding a rate of return of 3.18%, while the German DAX

closed the month 0.67% up.

In early August, the bears still prevailed over the bulls, but at the end of the month

green became increasingly visible, signaling growth. Declines in indices at the beginning

of August continued the sell-off that started in July and was caused by the escalation of

geopolitical tensions, mostly triggered by Russia. With time, however, supply became

less pronounced and the demand side became more active. Buyers also took into

account optimistic data from Europe, i.e. services PMI readings. The services PMI came

to 56.7 points in Germany, 59.1 points in the United Kingdom and 56.2 points in Spain

(for the entire eurozone, the services PMI rose to 53.5 points). Economic growth in the

eurozone in the second quarter came to 0.7% on an annual basis and was in line with

expectations. An upbeat reading of the German manufacturing PMI leading indicator (52

points) supported stock price increases in the second half of August.

Chart – Services PMI for selected markets


In the second half of the month, the investors’ eyes were fixed on the small U.S. town of

Jackson Hole in the Rocky Mountains. This was the venue of the annual meeting of

central bankers in which ECB President Mario Draghi also participated. Key parts of h is

statement concerned, as usual, inflation and economic growth in the eurozone. The

President of the ECB discussed the future shape of monetary policy and said that

inflation remained too low. CPI inflation in July (in annualized terms) amounted to 0.4%,

i.e. well below the target of 2%. Mario Draghi suggested that “unconventional

instruments” would be used, which has been interpreted as a signal that a European

version of QE would be launched (modelled on the U.S. scheme). Although there have

been similar statements in the past, it appears that with time, these have become

increasingly probable to materialize. Our analysts predict that an asset purchase

program will be launched by the ECB this fall.

Growth in the markets

QE increasingly likely in

Europe


12

Chart – CPI inflation in the EU vs. GDP in the EU


The rebound in indices observed in August seems to confirm the upward trend in

European markets. Further growth remains supported by the still relatively attractive

company valuations and the increasingly pronounced assistance from the ECB, which

should boost demand for risky assets and stimulate inflation. Given the surplus in the

current account combined with the depreciation of the European single currency, we

should also see an increase in the profits of those companies that sell their products

outside the eurozone, which is one of the factors determining further growth in European

stock markets.

Obviously, a risk to this scenario is the persistent uncertainty associated with the

developments in Ukraine and further sanctions. One should assume that the coming

months will provide arguments both for those investors who buy and for those who sell.

In the absence of stimulus measures from the ECB, lower-than-expected corporate

earnings and the still strong euro will conspire to derail our positive scenario for Europe.

Last month, weak economic growth together with the stubbornly low inflation and dovish

rhetoric from the ECB President brought the German bond yields below 1%, which

boosted their prices. In the coming months, we expect stabilization at levels close to the

current ones, mindful of the fact that the launching of a European QE could support the

persistently low yield scenario.

Chart – Yields of selected 10-year European government bonds


Europe should bring

positive returns

Risk factors still present


13

Japan

In the first week of August, poor sentiment on global stock markets affected the

Japanese stock market as well. However, the TOPIX was quick to recover and the

second half of the month saw a strong rebound, allowing the main index of the

Tokyo Stock Exchange to finish August just 0.9% down. The depreciation of the

Japanese yen boosted the indices as well. The USD/JPY exchange rate at the end of

the month was 104, i.e. the highest since April 2014. This breakout after several months

of consolidation gives hope that the USD/JPY pair will continue to move north, which

would be conducive to a bull equity market.

Chart – Relationship between the TOPIX and the USD/JPY exchange rate


August was another month which brought some weaker data from the Japanese

economy. As a result of the VAT increase, the gross domestic product contracted as

expected, decreasing by as much as 1.7% q/q (by 6.8% in annualized terms) in the

second quarter of 2014. This has been a poor result even given the not -very-impressive

long-term average for the Japanese market (0.5% q/q on average from 1980 to 2014.).

As expected, the April rise in the VAT rate significantly affected household spending as

well. Private consumption, which accounts for approximately 60% of GDP, dropped by

as much as 5.9%. The contribution of private investment also proved negative, falling by

a whopping 10.3%. At the end of August, preliminary data on industrial production were

released, showing it was 0.9% lower than a year earlier, while an increase of 3.1% y/y

had been observed a month before. The most recent flash manufacturing PMI proved

somewhat more optimistic at 52.3 points, giving hope that subsequent data from the

Japanese economy will steadily improve.

TOPIX regains lost ground

after the initial sell-off

Soft economic data but the

PMI indicates improvement


14

Chart – GDP in Japan in recent years (q/q)


On the other hand, the labor market still appears to be in very good condition – after

reaching 17-year lows in May at 3.5%, unemployment increased only slightly to 3.8% in

July.

At its last meeting, the Bank of Japan decided to maintain an expansionary monetary

course, stressing that it hoped for a rebound in the economy. The BoJ stated that it

would continue to purchase Japanese government bonds (JGBs), exchange-traded

funds (ETFs) and funds that invest in the Japanese real estate market (J-REITs – real

estate investment trusts). Our analysts expect that in October, the Bank of Japan may

expand its asset purchase scheme, which should favor stock market gains. In an

official statement, the BoJ stressed that the current deterioration in the data from the

Japanese economy was largely due to the increase in VAT. This effect should, however,

become weaker in the coming months. The April decision on changes in the tax system

also continues to be reflected in inflation readings. After the record reading in May this

year (+3.7% y/y), in July inflation amounted to 3.4% y/y.

Chart – CPI inflation in Japan since early 2013


-2%

-1%

0%

1%

2%

3%

4%

Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14

Bank of Japan still pursues

accommodative monetary

policy


15

Also in this case, the BoJ expects the impact of the VAT increase to become less

pronounced in the coming months, highlighting the importance of measures that will

bring the long-term CPI level closer to the 2% target. Worse data from the economy

have not changed the expectations of the Japanese government, which remains positive

about the future. Equity market investors also expect further reforms from Prime

Minister Shinzo Abe in the form of the so-called “third arrow”, which will concern the

economy and should involve e.g. a reduction in corporate income tax.

In analyzing investment opportunities in global equity markets, one can hardly overlook

the fact that the Japanese market offers very favorable valuations of the compan ies

listed on the Tokyo Stock Exchange. Its price to earnings ratio of 14.3 and forecasts

concerning the growth of corporate earnings this year (+18%) should also encourage

buyers.

Despite the mixed economic data recently reported from the Land of the Ris ing Sun, we

still see considerable potential in the Japanese equity market . Attractive valuations

supported by measures from the central bank should positively affect the performance

of Tokyo stock market indices.

Low valuations and central

bank policy support the

market


16

Emerging Markets

August has been another good month for those investors who purchased shares in

emerging markets. This is because the MSCI Emerging Markets increased 2.1% last

month. The first week of August brought some decreases resulting from poor sentiment

in global equity markets, but later the market quickly recovered the losses and by the

end of the month emerging market equities became the most expensive since

2011. The clear upward trend supported by the considerable recent inflows into

investment funds gives hope that the market will finally break out of several years of

consolidation and close the gap to developed markets.

Chart – MSCI Emerging Markets from 2009 to 2014


Good performance from emerging markets is justified by the local economies’

fundamentals. Recent data from the Chinese economy concerning GDP growth in Q2

2014 (7.5% y/y) confirm that China still stands out among the other emerging

markets. The most recent manufacturing PMI reading came to 50.2 points, possibly

reflecting the not entirely satisfactory condition of the sector, but still pointing to some

growth. On the other hand, the services PMI surprised on the upside by rising to 54.1

points from 50 points a month earlier.

Chart – Chinese manufacturing and services PMI


Favorable data from China

help


17

Investments in Chinese stocks appear particularly attractive if we look at the price to

earnings (P/E) ratio. This figure, at a level of 9.8, favors the Chinese market

compared to other emerging markets. It should be remembered, however, that among

the reasons for such low ratios are the valuations of banks, which are considered by

investors to be insufficiently restrictive in establishing provisions for bad loans. Despite

its strong fundamentals, the economy of the Middle Kingdom also hides some risks. The

greatest of them appears to be the bubble in the housing market, which results in

negative sentiment towards the property development and banking sectors.

In August, the main index of the Brazilian stock market (Bovespa) performed very well.

An increase of 9.8% in just a month is indeed impressive but this stellar performance

from the stock market is not reflected by the fundamentals of South America’s largest

economy. The latest GDP data demonstrate that the Brazilian economy contracted by

0.6% in Q2. High inflation (at 6.5%) combined with interest rates at 11 percentage

points will certainly not prove conducive to the continuation of this bull market. Even a

broader analysis of the data coming from Brazil’s economy does not yield any strong

case for further growth.

The main index of the Indian stock exchange (Sensex) ended the month 2.9% up,

continuing the strong upward trend seen in that market for over a year. The positive

sentiment is related to the new government and hopes for thorough economic reforms.

On the other hand, investors in the Turkish market had few reasons to celebrate. After a

very good July, in August the XU100 lost 2.2%.

Chart – Performance of the SENSEX (India), BOVESPA (Brazil), HANG SENG

(China) and XU100 (Turkey) in recent years


Chinese market remains the

most promising


18

The tapering (i.e. the gradual phasing out) of QE3 by the Fed, which was considered a

crucial risk factor for emerging markets, has not had any negative impact on stock

market indices in such countries as China, India and Brazil so far. We still think that

emerging markets require selective investment nowadays since they include both

countries whose fundamentals are very strong and those that are on the verge of

recession. We see particular potential in the markets of emerging Asia , which,

despite exhibiting fairly significant risk factors, appears to be an interesting addition to

an investor’s portfolio owing to compelling valuations.


19

Frontier Markets

The data coming from frontier markets may be considered mixed. We still witness

heightened geopolitical risks and African countries face problems associated with the

spread of the Ebola virus, which has had a negative impact on tourism in Kenya and

South Africa, among others. As a result of the epidemic, Botswana has halted im ports of

copper from the Congo after news of subsequent outbreaks surfaced. The situation is

very complicated in Liberia as well. However, it is worth stressing that these events

have been priced in the risk of investing in the region.

Burma, which is slowly emerging from its isolation, has become quite an interesting

subject. The Wall Street Journal reports that the country is at the early stage of talks

concerning the assignment of a credit rating. However, the further easing of sanctions

on Burma by the United States is increasingly being challenged due to internal tensions

and continuing restrictions on freedom of the press. On the other hand, further American

investment in the country is planned (including in solar energy).

The debt instrument market still deserves attention. This has been a record year in

terms of issuance volumes for African countries and subsequent sovereigns are

deciding to issue bonds. This has been the path of e.g. Ghana, which – apart from

seeking funding from the International Monetary Fund – is also trying to find a niche for

itself in the debt market.

The Africa/United States Summit has clearly sounded a positive message . Its

organizers estimate that the value of the contracts concluded (including e.g. loan

guarantees) exceeded USD 30 billion. Obviously, the key issue here is the sustainability

of such cooperation. However, the fact that Coca-Cola’s planned investment in the

region has been increased by almost 50% has been emblematic of the closer co-

operation between U.S. corporations and Africa.

In the context of debt, the subject of Argentina is constantly resurfacing. The country

revoked the authorization previously granted to the BNY Mellon bank to operate through

a branch. The reason was its failure to transfer the funds deposited by the Argentinian

central bank to bondholders. The Bank cited a judgment by a U.S. court. Argentina is

trying to resolve the problem by allowing a change in the jurisdiction governing the

bonds issued, which would make it possible to deposit interest coupons domestically.

This is supposed to overcome the problem related to the funds being blocked by a U.S.

bank.

Ebola virus still a threat

United States involvement in

frontier markets increases


20

Chart – Performance of the Argentine MERVAL index in recent years


Looking at the MSCI Frontier Markets, we can see that investors calmly eye the news

from Ukraine or from Africa (e.g. concerning the epidemic). The broad market declined

by 0.94%, which can be considered a success in the context of a fairly strong sell-off in

Europe. We repeatedly stress that investing in countries at an early stage of

development involves higher risk, but low correlation with developed markets and the

positive changes that occur in many economies included in the frontier markets category

still make them an interesting option enabling investors to diversify their portfolios.

Chart – MSCI Frontier Markets



21

Rates of return and indicators for selected indexes/asset classes (as of 31.08.14)

Equities Value Month YTD Year P/E P/E (2014) Div. Yield

WIG 51868,8 3,7% 1,1% 6,1% 23,8 15,3 3,2%

WIG30 2585,7 3,7% 1,9% 2,8% 23,5 15,2 3,4%

WIG50 2976,2 2,9% -7,1% 5,3% 17,6 16,1 2,4%

WIG250 1148,8 -0,8% -16,7% -5,3% 42,4 13,2 2,2%

S&P 500 2003,4 3,8% 8,8% 22,7% 18,0 16,7 1,9%

Eurostoxx 50 3172,6 1,8% 2,3% 16,6% 23,2 14,6 3,5%

Stoxx 600 342,0 1,8% 4,5% 15,0% 20,7 15,6 3,6%

Topix 1278,0 -0,9% -1,9% 15,5% 15,7 14,5 1,8%

Hang Seng 24742,1 -0,1% 6,4% 13,9% 11,0 11,7 3,6%

MSCI World 1748,7 2,0% 5,6% 18,7% 18,2 16,1 2,5%

MSCI Emerging Markets 1087,9 2,1% 8,6% 17,0% 13,9 12,1 2,7%

MSCI EM LatAm 3663,5 7,8% 14,3% 20,2% 19,8 14,6 3,1%

MSCI EM Asia 489,2 0,9% 9,8% 19,1% 12,9 12,2 2,4%

MSCI EM Europe 398,7 -1,1% -9,2% -2,1% 10,1 7,1 3,7%

MSCI Frontier Markets 697,4 -1,0% 18,0% 28,8% 11,9 11,0 3,8%

Commodities

Brent Crude 103,2 -3,1% -4,3% 0,0%

Copper 7008,5 -1,8% -5,1% -1,0%

Gold 1287,8 0,4% 7,6% -7,7%

Silver 19,5 -4,5% -0,5% -17,2%

TR/Jefferies Commodity Index 292,8 -0,6% 3,6% 0,5%

Bonds Duration

US Treasuries (> 1 yr) 363,1 1,2% 4,2% 4,4% 6,0

German Treasuries (> 1 yr) 394,3 1,8% 7,5% 7,5% 7,0

US corporate (Inv. Grade) 248,6 2,0% 7,9% 10,6% 7,9

US Corporate (High Yield) 237,7 1,6% 5,1% 9,7% 3,9

Polish Treasuries (1-3 yrs) 305,7 0,7% 3,3% 5,0% 1,7




Polish Treasuries (> 10 yrs) 291,4 3,3% 16,8% 19,0% 10,7

Foreign Currencies

USD/PLN 3,21 2,7% 6,7% -0,7%

EUR/PLN 4,21 0,7% 1,5% -1,5%

CHF/PLN 3,49 1,6% 3,1% 0,5%

EUR/USD 1,31 -1,9% -4,8% -0,7%

EUR/CHF 1,21 -0,9% -1,6% -1,9%

USD/JPY 104,09 1,3% -1,0% 6,0%

Source: Bloomberg

Macroeconomic Forecasts

GDP Growth (%) 2014 2015 2016

Poland 3,1 3,5 3,6

United States 2,1 3,2 3,2

Eurozone 0,8 1,5 1,9

China 7,5 7,1 6,7

Emerging Markets 4,4 5,0 5,1

Developed Markets 1,8 2,4 2,5

Inflation (%) 2014 2015 2016

Poland 0,3 2,0 2,7

United States 1,6 1,9 2,2

Eurozone 0,5 0,9 1,2

China 2,3 2,6 2,7

Emerging Markets 4,9 5,0 4,6

Developed Markets 1,6 1,7 1,5

Source: Citi Research

FX Forecasts (period-end)

Currency Pair IIIQ 14 IVQ 14 IQ 15 IIQ 15

USD/PLN 3,14 3,18 3,22 3,18

EUR/PLN 4,17 4,23 4,28 4,26

CHF/PLN 3,36 3,44 3,45 3,41

GBP/PLN 5,35 5,49 5,56 5,53

Source: Citi Handlowy


22

Glossary of Terms

Polish Shares denote shares traded on the Warsaw Stock Exchange (WSE) and included in the WIG index

U.S. Treasuries bonds issued by the government of the United States of America; figures used for the Bloomberg/EFFAS US

Government Bond Index > 1Yr TR, measuring performance of U.S. Treasuries whose maturity exceeds 1

(one) year

Citi Research a Citi entity responsible for conducting economic and market analyses and research, including that concerning

individual asset classes (shares, bonds, commodities) as well as individual financial instruments or their

groups

Div. Yield the amount of dividend per share over the share’s market price. The higher the dividend yield, the highe r the

yield earned by the shareholder on the invested capital

Long Term a term of more than 6 (six) months

Duration a modified term of a bond, measuring the bond’s sensitivity to fluctuations in market interest rates. It provides

information on changes to be expected in the yield on bonds in the event of a 1 (one) p.p. change in the

interest rates

Short Term a term of up to 3 (three) months

Copper figures based on the spot price per 1 (one) ton of copper, as quoted on the London Metal Exchange

German Treasuries

(Bunds)

bonds issued by the government of the Federal Republic of Germany; figures used for the Bloomberg/EFFAS

Germany Government Bond Index > 1Yr TR, measuring performance of German treasury bonds whose

maturity exceeds 1 (one) year

P/E (2014) a projected price/earnings ratio providing information on the price to be paid per one unit of 2014 projected

earnings per share, measured as the ratio of the current share price and the earnings projected by analysts

(consensus) for a specified year (2014)

P/E

(price/earnings)

the historic price/earnings ratio providing information on the number of monetary units to be paid per one

monetary unit of earnings per share for the preceding 12 (twelve) months, measured as the ratio of the

current share price and earnings per share for the preceding 12 (twelve) months

Polish Treasuries bonds issued by the State Treasury; figures based on the Bloomberg/EFFAS Polish Government Bond Index for the corresponding term (>1 year, 1–3 years, 3-5 years, over 10 years)

Brent Crude Oil figures based on an active futures contract for a barrel of Brent Crude, as quoted on the Intercontinental

Exchange with its registered office in London

Silver figures based on the spot price per 1 (one) ounce of silver

Medium Term a term of 3 (three) to 6 (six) months

U.S. Corporate

(High Yield)

bonds issued by US corporations which have been given the speculative grade by one of the recognized

rating agencies; figures based on the iBoxx $ Liquid High Yield Index measuring performance of highly liquid

US corporate bonds with the speculative grade

U.S. Corporate

(Inv. Grade)

bonds issued by U.S. corporations which have been assigned an investment grade by one of the recognized

rating agencies; figures based on the iBoxx $ Liquid Investment Grade Index measuring performance of highly

liquid U.S. investment grade corporate bonds

YTD (Year To Date) a financial instrument’s price trends for the period starting 1 January of the current year and ending today

YTM (Yield to

Maturity)

the yield that would be realized on an investment in bonds on the assumption that the bond is held to maturity

and that the coupon payments received are reinvested following YTM

Gold figures based on the spot price per 1 (one) ounce of gold


23

Additional Information

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This commentary has been prepared by Bank Handlowy w Warszawie S.A. (hereinafter referred to as the “Bank”). Market commentar y

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This commentary has been prepared by reference to available, reliable data, with a proviso that the Bank has not been authorized to

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exact level or the maximum percentage share of the respective investment products or asset classes suitable for each Customer may


24

not be specified precisely. Concentration of assets may generate greater risk than a diversified approach to financial instru ments and

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