June 2013
17 June 2013 | 19 pages
Miracle at the Vistula – this time in May
Market Outlook of the Investment Advisory Bureau
Jacek Janiuk, CIIA
In May, stock market indices in most developed and emerging markets again moved
in the opposite directions. While in the U.S. (+2.1%) and European ( Eurostoxx50
+2.1%, Stoxx600 +1.4%) markets the adage “sell in May and go away” did not apply,
it proved very relevant indeed in the emerging markets of Latin America ( -7.2%) and
in emerging Europe (-3.2%). Unexpectedly, Japan turned out to be the “black sheep”
among developed markets this time (-2.5%).
Conversely, Poland proved the “dark horse” in May – the best performing stock
market among those analyzed by us (WIG broad market index: +8.3%). However,
these impressive rates of return on equity indices were accompanied by increases in
the yields (and therefore declines in the prices) of most government bonds.
The global economy yielded ambiguous figures in May, although it is noticeable that
the “spring slowdown,” which we mentioned a month ago, may be less
pronounced or even coming to an end. This is evidenced by the latest readings
from the U.S. economy, improving – though still recessionary – data from the
eurozone, and the noticeable improvement in sentiment and expectations for GDP
growth and corporate earnings in Japan. The markets are, however, being weighed
down by the worse-than-expected performance of the Chinese economy and by
emerging concerns over the future of the monetary easing program in the U.S.
We consistently favor stocks over bonds, but bearing in mind the unresolved issue
of Polish open-ended pension funds, we recommend geographical diversification
and continue to see value in selected foreign markets. We consider the uncertain
future of pension funds to be the most important risk factor that we will track in the
nearest months. The change in the system has already been priced in to some
extent (the WIG20 blue chip index has been one of the worst performing year-todate), although the direction and scale of the measures put forward by the
government will have a crucial impact on the prospects of the Polish market.
Globally, the expansive monetary policy of central banks, both in the form of
unconventional measures (the policy pursued by the Fed and BoJ) and traditional
remedies (interest rate cuts), which keeps the price of money low, should support
the economy and global equity markets. In addition, some tail risks that were present
just a few months ago are no longer on the horizon.
We remain neutral regarding the Polish government bond market (both in terms
of duration and compared to foreign markets). We believe that the investors’
immediate response could have been slightly exaggerated and a rebound in June is
possible. At the same time, we continue to emphasize that over the entire year, a
further increase in yields remains more probable than any downward movement.
1
Investment Advisor
Radosław Piotrowski, CFA
Securities Broker
Jakub Wojciechowski
Securities Broker
140
130
120
110
100
90
May-12
Jul-12
WIG20
Sep-12 Nov-12
Jan-13 Mar-13
S&P500
Eurostoxx50
115
110
105
100
95
May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13
Polish bonds
US Treasuries
Source: Bloomberg, Citi Handlowy
German bunds
Investment Barometer
17 June 2013
Poland
The Polish stock market has
gone north…
…and the bond one – south
Domestic indices were
supported by quarterly
corporate results…
In May, after four months of general misery, the Polish stock market turned out
to be among the best-performing in the world. Both those investors who
targeted large companies (WIG20 gained 7.2% in May) and those who favored
small and medium-sized ones (the mWIG40 and sWIG80 advanced 10.3% and
9.6% in May, respectively) had reason for satisfaction.
In the debt market in turn, a different mood prevailed this month. Although the
short end of the yield curve (government bonds with durations ranging from 1
to 3 years) remained neutral (0% in May), investors who picked securities with
the longest duration (government bonds > 10 years) lost up to 2.4%.
Looking at the May performance of the Polish stock market, it is difficult to
pinpoint many factors that could support such impressive advances. One of
those could certainly be the quarterly reporting season that ended mid-month.
Although it did not go off to a promising start (as we mentioned in the previous
issue of the Barometer), it eventually turned out that the devil was not so black
as he was painted. Although earnings decreased in line with the analysts’
forecasts, but the decline was much smaller than expected (see Chart below).
It should also be remembered that valuations in the Polish market have
become relatively attractive after the sell-off that took part during the first four
months of the year.
Chart – Changes in the earnings of WIG20 and mWIG40 stocks in absolute terms and
relative to market expectations
20%
10%
0%
WIG20
mWIG40
-10%
-20%
-30%
Change (yoy)
Surprise
Source: Bloomberg, Citi Handlowy
…despite the ambiguous
macroeconomic situation
Macroeconomic forecasts pointing to a recovery in the Polish economy in the
second half of the year may support the stock market. However, in our view
this argument is not sufficiently strong in the absence of strong signs of
economic improvement both with respect to leading economic indicators (such
as the industrial PMI whose reading on 3 June surprised on the positive side at
48 points versus expectations at 47.7 points and the previous level of 46.9
points, but this did not affect the performance of indices in May) and to hard
data (such as retail sales, industrial production or employment growth).
2
Investment Barometer
17 June 2013
A statement by the former President of the Constitutional Court Jerzy Stępień,
who stated in an interview on 27 May that any attempt to expropriate the
savings collected in open-ended pension funds would be unconstitutional,
propped up markets – the WIG broad market index gained 2.5% on the same
day.
Chart – Selected macroeconomic readings for the Polish economy (2008–2013)
25%
20%
15%
10%
5%
0%
-5%2008
-10%
-15%
-20%
-25%
2009
2010
Industrial production (left axis)
2011
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
2012
Retail sales (left axis)
Employment (right axis)
Source: Bloomberg, Citi Handlowy
We generally favor the stock
market…
…but watch out for pension
funds
We do not discount this opinion, but in our view it does not guarantee the
pension funds’ future. We continue to consider the uncertain fate of openended pension funds as a local tail risk and recommend caution with respect to
the Polish stock market. While we generally favor the stock market in
general, we also see a strong case (e.g. in view of the response of the
Hungarian stock market to the news of the nationalization of domestic pension
funds in November 2010 – see Chart below) for geographical diversification
and continue to see value in selected foreign markets.
Chart – Performance of the BUX (Budapest Stock Exchange) index in November 2010
23 500
23 000
22 500
22 000
21 500
21 000
-12,6%
20 500
20 000
19 500
Oct-10
Nov-10
Nov-10
Nov-10
Source: Bloomberg, Citi Handlowy
In the coming weeks, we should get answers concerning the future of pension
funds and thus the possible continuation of the upward trend in the domestic
3
Investment Barometer
17 June 2013
stock market that began in the past month. This could in turn allow us to take a
more positive stance on the domestic market.
Within the Polish stock market, we invariably prefer small cap growth stocks,
which are less vulnerable to potential shocks related to pension funds, are
more attractively valued and have better earnings prospects. These should
also be supported by the continued inflows to domestic equity funds.
Local factors supported the
bond market in May…
…but yields in core markets
did not
The domestic bond market also surprised in May, but this was a less pleasant
surprise. Most local fundamentals such as high real yields owing to the 0.8%
inflation rate, mediocre macroeconomic data and the dovish attitude of
Monetary Policy Council members (our economists expect that the base
interest rate may go down to 2.5% in July from the current level of 2.75%) were
supportive for the domestic debt market and these prevailed in the first half of
May. Subsequently, however, the main risk factor to our neutral scenario from
the previous month emerged, i.e. the increase in yields in core markets (e.g.
the U.S. or Germany). As a result, investing in Polish debt became
automatically less attractive to foreign investors due to the smaller differential
in yields (spread) (see Chart below). The result was a massive outflow of funds
from the Polish market; apart from increasing yields, this was also evident in
the depreciation of the zloty.
Chart – Yields of Polish, German and U.S. 10-year government bonds (January 2013–
May 2013)
4,2%
2,2%
4,0%
2,0%
3,8%
1,8%
3,6%
1,6%
3,4%
1,4%
3,2%
1,2%
3,0%
Jan-13
1,0%
Feb-13
Poland (left axis)
Mar-13
Apr-13
Germany (right axis)
May-13
USA (right axis)
Source: Bloomberg, Citi Handlowy
Possible rebound in the
short term…
…but do not forget risk
factors
The developments on the domestic bond market in May surprised not so much
with respect to the direction in which yields went as regarding the rate at which
they rose. We believe that the investors’ immediate response could have been
a bit exaggerated and therefore we maintain our neutral stance within the
bond market (the long end vs. the short end of the yield curve), but we
continue to emphasize that over the entire year, a further increase in yields
remains more probable than any downward movement.
The main risk factor to our short-term neutral scenario is the continued
increase in yields in core markets. Long-term bonds would suffer more owing
to the greater sensitivity of their prices to movements in yields.
4
Investment Barometer
17 June 2013
United States
U.S. indices soar ever
higher…
May was another good month in the U.S. market. Despite predictions of the
inevitable correction, the demand for stocks remains strong and the continued
rotation from money market funds and government bonds supports equity
indices. Although in technical terms, some correction would be welcome after
an increase of more than 16% year to date, neither the economy nor politicians
have provided any arguments that would justify a large sell-off.
Chart – Performance of the S&P 500 index following the closure of the QE1 and QE2
programs
QE1
1600
QE3
QE2
1400
1200
1000
800
600
2008
2009
2010
2011
2012
2013
Source: Bloomberg, Citi Handlowy
…but investors are
increasingly fearful of
ending QE
However, it cannot be denied that one issue haunts investors in the U.S.
market – the impending end of QE3. As long as the “music is playing” (i.e.
the Fed pumps 85 billion US dollars a month into the economy), the entire
market is dancing to it. While difficult to accept for some, this drip will be
disconnected sooner or later and quantitative easing programs (not just in
the U.S.) will have to be phased out. The first central bank to take this step will
probably be the Fed. In the past, the S&P 500 slumped by 15% and 23%
respectively after QE1 and QE2 had ended. Thus such concerns appear
entirely reasonable, especially in view of the ambiguous message conveyed by
the most recent Federal Open Market Committee conference. Ben Bernanke
reiterated that any premature tightening in monetary policy might negativel y
affect the economic recovery, but also stated that if the Committee sees any
signs of sustainable improvement, it could reduce the scale of current
purchases over the next few meetings. Citi analysts predict that QE3 will
continue into the spring of next year, while emphasizing that it could be
reduced in scale as soon at the end of this summer.
5
Investment Barometer
17 June 2013
Chart – GDP growth drivers in the U.S.
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
Citi forecast
IVQ10 IQ 11 IIQ 11 IIIQ 11 IVQ 11 IQ 12 IIQ 12 IIIQ 12 IVQ 12 IQ 13 IIQ 13 IIIQ 13 IVQ 13
Government expenditures
Inventories
Private consumption
Net exports
Investments
GDP growth
Source: Bureau of Economic Analysis, Citi Handlowy
Decent economic growth
in the U.S…
…although
macroeconomic data
remain mixed
The economy itself has recently supplied arguments for limiting asset
purchases by the Fed. Annualized GDP growth in the first quarter of the
year came to 2.4%, which was only slightly worse than the preliminary
reading. The figure published by the U.S. Bureau of Economic Analysis differs
from those published e.g. by the Polish Central Statistical Office – it shows by
how much the economy would grow if the first-quarter GDP growth rate were
sustained throughout the year. Although this increase is not high, it still
stands out among developed countries (while the eurozone economy
remains mired in recession). It should also be noted that the government
sector was the greatest negative contributor to the growth rate of the U.S.
economy, which was related to the reduction in public expenditure (the start of
sequestration). This drag factor will probably be still noticeable in data for the
second quarter, when our economists expect a local trough (growth at the rate
of 1.5%). However, Citi forecasts for the second half of the year are much
better with growth rates of 2.4% in Q3 and 3.1% in Q4. It should be pointed out
here that despite public spending cuts and an increase in taxes, the standing
of the private sector appears satisfactory. Both consumption and
investment remain stable.
Although GDP figures tell us what has already happened, it is just as important
(if not more so) for the stock market to peer into the future, which is to some
extent possible thanks to leading indicators. Recent readings of popular and
closely tracked indexes such as ISM Manufacturing, Chicago PMI, consumer
confidence or unemployment applications yield ambiguous signals. They do
not give grounds for claiming that the spring slowdown in the U.S.
economy is coming to an end, but assuming a smaller impact of fiscal
tightening in the coming months and an agreement on the debt ceiling, the
second half of the year should in fact bring a slight improvement.
6
Investment Barometer
17 June 2013
Chart – Forward P/E ratio for the S&P 500 index against the average since 2006
20
18
16
14
12
10
8
2006
2007
2008
2009
2010
2011
2012
2013
Source: Citi Private Bank
Has the recovery already
been priced in?
The key question for investors is whether the forecast improvement in the
outlook for the U.S. economy has already been priced in. This is our
impression, particularly that stock market indices remained unmoved by the
worse data that have been published in recent months (this had much to do
with the hopes that the end of QE3 would be delayed). Now, however, that the
economy seems to be doing slightly better, the Fed is making hawkish noises
and the S&P 500 is close to historic peaks, a cautious stance on the U.S.
stock market appears reasonable in our opinion, especially considering that
its valuation is not that attractive at the moment (see Chart above).
Eurozone
Europe continues to lag
behind developed markets
Since the second half of April, European stock market indices have
continued to inch higher slowly and laboriously. The Stoxx600 index rose a
further 1.4%, and the Eurostoxx50 advanced 2.1% so as not to stay behind the
U.S. market. Interestingly, the German DAX has already reached historic
peaks not seen since the 2007 bull market. In year-to-date terms, however,
Europe is still lagging somewhat behind other developed markets. Given
the relatively low valuation of its stock markets and favorable corporate
earnings growth prospects, this makes the continent still attractive.
7
Investment Barometer
17 June 2013
Chart – Stock index performance in developed countries
150
140
130
120
110
100
90
Jan-13
Feb-13
Mar-13
Eurostoxx 50
Apr-13
S&P500
May-13
Jun-13
Topix
Source: Bloomberg, Citi Handlowy
Leading indicators give
hope of improvement in
the economy…
Recent signals from the eurozone have been moderately positive.
Improved sentiment could be discerned in leading business indicators such as
the PMI, which proved better than expected both for individual countries and
for the entire eurozone (see Chart below). The consumers’ mood has also
lightened, with confidence indices slightly higher than a month before.
Moreover, politicians are gradually moving away from strict austerity
measures, which, as some market observers claim, are to blame for the
continued recession in the eurozone. Recently, the European Commission has
agreed to give several countries (including France and Spain) more time to cut
the deficit to 3%, i.e. the maximum level allowed under the Stability and
Growth Pact.
Chart – Manufacturing PMI in the eurozone in the past 3 months
50
48
46
44
42
40
France
Italy
March
Spain
Germany
April
Eurozone
May
Source: Bloomberg, Citi Handlowy
…particularly if the ECB
steps in to help
However, recovery signals in Europe have been fairly faint to date. It is highly
probable that the second quarter of this year will be the seventh consec utive
three-month period to see the eurozone economy shrink. Given the still low
inflation rate in the eurozone, pressure is mounting on the European
8
Investment Barometer
17 June 2013
Central Bank to give stronger stimulus to the economy. The recent reduction
in the cost of money in the eurozone by 25 basis points hardly qualifies as
such in the markets’ opinion. A major problem for the European private sector
is the still difficult access to funding from banks (see Chart below). This
has little to do with the interest rates themselves (which cannot really go much
lower) and much more to do with the strict criteria applied by financial
institutions, which result from their risk aversion – especially in peripheral
countries, where banks are simply afraid to lend owing to the uncertain
economic situation. This results, among other things, in a higher real cost of
credit, especially for small and medium-sized enterprises (due to the high
margins demanded by the banks). In recent weeks, the ECB has signaled that
discussions are underway concerning measures that could remedy this
situation. Some want to stimulate lending by reviving the ABS (assetbacked securities) market – these are financial instruments that make it
possible to transfer credit risk from banks to investors (provided, obviously,
that there are any takers). In practice, this would likely force the ECB to launch
some kind of an asset purchase scheme (modeled on QE programs in the
U.S., Japan or the UK). However, it is difficult to say whether the Bank is ready
for such a step, especially given the conservative tone of President Mario
Draghi’s statements.
Chart – Major problems indicated by small and medium-sized enterprises
Finding clients
14%
12%
Access to funding
13%
15%
Labour/manufacturing costs
29%
17%
Qualified labour
Competition
Regulations
Source: ECB, Citi Handlowy
Equity market still
attractive
What can be said about the stock market in the eurozone though? It certainly
remains attractive with respect to valuations – this is the market where some of
the highest increases in corporate earnings are predicted for the next 12
months. The earnings season that was concluded in May indicates that
European companies are relatively resilient to the prolonged recession
and report results in line with the analysts’ expectations. Particularly interesting
here are cyclicals that have underperformed defensive stocks in the past year,
have much more exposure outside the eurozone and are currently priced at a
discount. At the same time, hopes for the continued positive sentiment in
equity markets are linked to the European Central Bank, which guarantees
calm in the financial markets of the eurozone. Any measures by the ECB
aimed at supporting the private sector should be welcomed by the market.
Improved sentiment is reflected in decreases in peripheral government bond
yields, which have hit the lowest levels for years; it is also worth mentioning
9
Investment Barometer
17 June 2013
that Citi economists have abandoned the Grexit scenario, which was predicted
as a technical assumption for early 2014. The performance of stock indices in
the coming months will largely depend on whether the recent more upbeat
news from EU economies yield something more than just hope this time.
Japan
Japan the “black sheep” in
May
A long-awaited correction has finally arrived in the Japanese market. While the
1
first three weeks of May were “a calm before the storm” (with the TOPIX index
gaining 9.5% by 22 May), in the last eight days of the month the bull camp was
subject to two onslaughts by bears (see Chart below), which finally drove the
TOPIX into the red (-2.5% for the month).
Chart – Performance of the TOPIX index in May
1300
1250
-6,9%
1200
-3,8%
1150
1100
Apr-13
May-13
May-13
May-13
May-13
Source: Bloomberg, Citi Handlowy
Market decline caused by
China, the Fed and JGBs…
May developments on the Japanese stock market have reminded investors that
no bull market lasts forever; yet before these declines, the TOPIX had grown
by 74% from the end of October 2012. Therefore some of the May events that
conditioned the sudden slump in the index can be interpreted in terms of an
excuse for profit-taking. These include the weaker flash manufacturing PMI
readings for the Chinese industry that we mentioned in our 23 May Special
Commentary. While these could be interpreted as signaling lower demand for
the goods and services exported by Japan to the Middle Kingdom going
forward, but set against the share of exports to China in Japan’s GDP (see
Chart below), these fears appear overdone.
1
Owing to the structure of the Nikkei index (which is price weighted, i.e. the weights of individual stocks
included in the index are determined by their prices) and the fact that the impact of some companies on
index performance has been disproportionate to their size, from this issue of the Barometer onwards we will
use the TOPIX (which is a market capitalization weighted index, i.e. the weights of individual stocks included
in the index are in proportion to their market capitalization), which reflects the performance of the Japanese
stock market more reliably.
10
Investment Barometer
17 June 2013
Chart – Exports to China as a percentage of Japanese GDP
Export to other
countries
12%
Export to China
2%
GDP ex. export
86%
Source: Citi Research
The second factor pointed out in our Special Commentary, i.e. concerns about
the restriction and finally the end of the quantitative easing (QE3) program in
the United States, was probably not in play here either. The limitation and
subsequent phasing out of the QE3 should be a positive development for
Japan – the likely result will be the appreciation of the US dollar, including
against the yen.
…but the performance of
JGBs is to be watched
In our view, the most important event in May was a sudden and rapid growth
in the yields of Japanese government bonds (JGBs). One of the underlying
assumptions of Abenomics is maintaining JGB yields at relatively low levels so
that interest rates on long-term loans (e.g. mortgages) are not adversely
affected, which could result in the reduction of the Japanese citizens’
disposable income that can drive consumption.
Chart – 10-year Japanese government bond yields (March 2013–May 2013)
1,0%
0,9%
0,8%
0,7%
0,6%
0,5%
0,4%
Mar-13
Apr-13
Source: Bloomberg, Citi Research
11
Apr-13
Apr-13
May-13
May-13
May-13
Investment Barometer
17 June 2013
In our opinion, some rise in yields is inevitable as long as the economic
recovery is progressing and inflation expectations are rising. It should not be
too high, however, and above all not as sudden as was the case in Japan in
May. Thus we will closely track the performance of Japanese government bond
yields in the coming months.
Other significant events that may attract the investors’ attention in the near
future include the announcement of the growth strategy for Japan in June and
elections to the upper house of the Japanese parliament in July. Prime Minister
Abe’s party leads in the polls so far, and a favorable outcome of the elections
that would enable the efficient implementation of this growth strategy could be
welcomed by investors.
The Japanese market still
has potential…
Therefore we maintain our positive view on the Japanese equity market.
Despite the fact that its valuations are no longer as attractive as was the case
a few months ago, they are still lower than historical averages and there are
many other factors that support this market (improving macroeconomic data,
forecasts of corporate earnings growth, the possible extension of the Japanese
QE program if there are problems with hitting the inflation target at 2%).
Another supporting factor should be increasing inflows into the Japanese stock
market from foreign investors. As those who still have doubts become
convinced that the new path of Japan’s development is the right one (and there
are probably still many who remember the numerous false starts from past
years), these inflows should increase further.
Chart – Inflows of foreign funds into the Japanese stock market (two-month moving
average) and the performance of the TOPIX index (2001–2013)
20000
800
18000
600
16000
14000
400
12000
10000
200
8000
0
6000
4000
-200
2000
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
TOPIX (left axis)
-400
Inflows (two-month moving average; right axis)
Source: Bloomberg, Citi Handlowy
While considerable volatility remains a possibility in the Japanese market in
the short term, the aforementioned fundamental factors should prevail after the
mood has calmed.
…but watch out for JGBs
The main risk factors for our positive forecast are the aforementioned
excessive increase in JGB yields, an unfavorable outcome of the elections
and/or disappointing assumptions underlying the growth strategy.
12
Investment Barometer
17 June 2013
Emerging Markets
Emerging markets failed to
keep pace with their
developed counterparts
Despite the fact that for the most part of May the emerging markets kept pace
with their developed counterparts, the end of the month was less promising.
Ultimately, they finished 2.9% in the red (MSCI Emerging Markets), and so the
gap between them and the developed stock markets, which has been evident
since the beginning of the year, has increased.
Chart – Performance of developed markets (MSCI World) and EMs (MSCI Emerging
Markets) year to date
115
110
105
100
95
90
Jan-13
Feb-13
Mar-13
MSCI World
Apr-13
May-13
MSCI Emerging Markets
Source: Bloomberg, Citi Handlowy
The situation in the Middle
Kingdom weighs down
commodity exporters
The poor performance of EMs in May was indirectly caused by China, which
should not come as a surprise, since we have mentioned this several times.
Many emerging markets (such as Brazil, Russia or South Africa) are largely
dependent on Chinese demand for raw materials (China accounts for 20% of
the global demand for energy commodities such as oil and gas and for 50% of
the demand for base metals).
The Chinese data that were published in May did not dispel doubts; on the
contrary, they fueled concerns about the outlook for the Chinese economy
(suffice it to mention the weaker-than-expected flash manufacturing PMI
reading from 23 May that shook indices around the world – see Chart below).
13
Investment Barometer
17 June 2013
Chart – HSBC flash manufacturing PMI reading for China against the market consensus
and the response of selected stock market indices (23 May 2013)
50,6
50,4
50,2
50
49,8
49,6
49,4
49,2
-4%
Forecast
Actual
HSBC flash PMI Manufacturing
-5%
MSCI Emerging Markets
-3%
MSCI World
-2%
TOPIX
-1%
Shanghai Composite
0%
-6%
Source: Bloomberg, Citi Handlowy
Chinese authorities’
dilemmas
A lot of bad news already
priced in
Chinese authorities face a real dilemma – on the one hand they wish to
maintain economic growth at current levels (i.e. 7.5% to 8% annually), and on
the other they must remain on top of the developments in the domestic real
estate market and halt further price increases in this sector. Weak global
demand (with global GDP growth remaining below potential) further
complicates the situation by exerting downward pressure on industry and
exports. This makes the government dependent on investments in
infrastructure and in real estate as drivers of growth, i.e. precisely those
sectors in which excessive growth is to be curbed.
However, after such a long period of weak emerging markets performance,
they have become very attractive in terms of valuations (e.g. the price /
earnings ratio – see Chart below) both against their historical averages and as
compared to developed markets.
Chart – Price / earnings ratio for selected markets
18
16
14
12
10
8
6
4
2
0
Developed
markets
Emerging
markets
Latam
Emerging Asia
CEEMEA¹
¹Central & Eastern Europe, Middle East & Africa
Source: Citi Research
Asia still has the most
potential
Moreover, the improving outlook for global demand, mostly thanks to the
United States, should have a positive impact on countries that have strong
14
Investment Barometer
17 June 2013
trade links to the U.S. Most of these countries are in Asia (Taiwan, Korea), and
therefore we maintain our positive outlook for the region.
In addition, we must not forget that despite the fact that China is no longer
growing by 10% or more a year, Emerging Asia will remain the fastest growing
region of the world in both this and next year (see Chart below).
Chart – GDP growth forecast for selected regions for 2013 and 2014
7%
6%
5%
4%
3%
2%
1%
0%
Developed
markets
Emerging
markets
Emerging Asia
2013
Source: Citi Research
15
Latam
2014
Europe
Africa&Middle
East
Investment Barometer
17 June 2013
Rates of return and indicators for selected indexes/asset classes
Equities
WIG 20
mWIG 40
sWIG 80
S&P 500
Eurostoxx 50
Stoxx 600
Topix
Shanghai Composite
MSCI World
MSCI Emerging Markets
MSCI EM LatAm
MSCI EM Asia
MSCI EM Europe
Value
2485,5
2812,8
11518,9
1630,7
2769,6
300,9
1135,8
2300,6
1471,9
1008,9
3505,4
441,2
441,1
Month
7,2%
10,3%
9,6%
2,1%
2,1%
1,4%
-2,5%
5,6%
-0,3%
-2,9%
-7,2%
-1,1%
-3,2%
YTD
-3,8%
10,2%
10,3%
16,3%
5,4%
7,9%
32,1%
3,0%
10,9%
-4,4%
-7,8%
-1,3%
-7,1%
Year
18,6%
25,3%
24,0%
24,5%
30,7%
25,5%
57,9%
-3,0%
25,0%
11,3%
3,3%
14,6%
20,0%
Commodities
Brent Crude
Copper
Gold
Silver
TR/Jefferies Commodity Index
100,4
7280,8
1387,9
22,3
281,9
-1,6%
3,7%
-6,0%
-8,5%
-2,2%
-6,3%
-7,4%
-16,2%
-25,9%
-4,4%
1,6%
-2,1%
-11,1%
-19,7%
3,3%
Bonds
US Treasuries (> 1 yr)
German Treasuries (> 1 yr)
US corporate (Inv. Grade)
US Corporate (High Yield)
Polish Treasuries (1-3 yrs)
Polish Treasuries (3-5 yrs)
Polish Treasuries (5-7 yrs)
Polish Treasuries (7-10 yrs)
Polish Treasuries (> 10 yrs)
356,0
373,2
231,6
220,4
291,8
319,5
224,9
364,2
264,0
-1,9%
-1,4%
-3,2%
-0,9%
0,0%
-0,8%
-1,5%
-2,0%
-2,4%
-1,3%
-0,4%
-1,8%
3,2%
1,9%
1,9%
1,3%
2,2%
2,6%
-1,1%
-0,6%
5,3%
13,7%
7,4%
11,2%
13,9%
18,8%
27,5%
Foreign Currencies
USD/PLN
EUR/PLN
CHF/PLN
EUR/USD
EUR/CHF
USD/JPY
3,29
4,28
3,45
1,30
1,24
100,45
4,1%
2,8%
1,3%
-1,3%
1,4%
3,1%
6,7%
4,9%
2,1%
-1,6%
2,8%
16,9%
-7,3%
-2,6%
-5,7%
5,1%
3,4%
28,3%
P/E
11,9
58,1
29,9
15,9
17,5
19,8
21,9
12,4
16,8
12,3
18,2
12,9
6,2
P/E (2013) Div. Yield
12,8
5,1%
18,5
3,1%
12,1
1,3%
14,8
2,1%
11,9
4,1%
13,2
3,6%
15,1
1,8%
9,9
2,5%
14,3
2,6%
10,8
2,7%
12,8
3,1%
11,1
2,4%
6,5
3,7%
Duration
5,7
6,8
7,7
4,1
2,1
3,9
5,5
6,8
10,0
Source: Bloomberg
Macroeconomic Forecasts
FX Forecasts (period-end)
Currency Pair
USD/PLN
EUR/PLN
CHF/PLN
GBP/PLN
IQ 2013 IIQ 2013 IIIQ 2013 IVQ 2013
3,15
4,12
3,30
4,79
3,25
4,16
3,33
4,78
3,36
4,20
3,36
4,77
3,35
4,15
3,29
4,72
Source: Citi Handlowy
GDP Growth (%)
Poland
United States
Eurozone
China
Emerging Markets
Developed Markets
2012
1,3
1,9
-0,7
7,7
4,9
1,1
2013
2,8
2,9
0,0
7,3
5,3
1,7
2014
3,3
3,2
0,8
7,0
5,5
1,5
Inflation (%)
Poland
United States
Eurozone
China
Emerging Markets
Developed Markets
2012
1,0
1,3
1,5
2,9
4,8
1,3
2013
2,0
2,1
1,3
3,1
4,7
1,8
2014
2,5
2,1
1,4
3,5
4,7
1,5
Source: Citi Research
16
Investment Barometer
17 June 2013
Investment Advisory Bureau
Jacek Janiuk, CIIA
Radosław Piotrowski, CFA
Jakub Wojciechowski
Investment Advisor
Securities Broker
Securities Broker
Glossary of Terms
Polish Equities
US Treasuries
Citi Research
Div. Yield
(Dividend Yield)
Long Term
Duration
Short Term
Copper
German
Treasuries
P/E (2013)
P/E
(price/earnings)
Polish Treasuries
Brent Crude Oil
Silver
Medium Term
US Corporate
(High Yield)
US corporate
(Inv. Grade)
YTD (Year To
Date)
YTM (Yield to
Maturity)
Gold
denote shares traded on the Warsaw Stock Exchange (WSE) and included in the WIG index
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 US
Treasuries whose maturity exceeds 1 (one) year
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
the amount of dividend per share over the share’s market price. The higher the dividend yield, the
higher the yield earned by the shareholder on the invested capital
a term of more than 6 (six) months
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.
a term of up to 3 (three) months
figures based on the spot price per 1 (one) ton of copper, as quoted on t he London Metal
Exchange
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
a projected price/earnings ratio providing information on the price to be paid per one unit of 2013
projected earnings per share, measured as the ratio of the current share price and the earnings
projected by analysts (consensus) for a specified year (2013)
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
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)
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
figures based on the spot price per 1 (one) ounce of silver
a term of 3 (three) to 6 (six) months
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 m easuring
performance of highly liquid US corporate bonds with the speculative grade
bonds issued by US corporations which have been given the investment grade by one of the
recognized rating agencies; figures based on the iBoxx $ Liquid Investment Grade Index
measuring performance of highly liquid US corporate bonds with the investment grade
a financial instrument’s price performance for the period starting 1 January of the current year and
ending today
yield to maturity, specifying 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
figures based on the spot price per 1 (one) ounce of gold
17
Investment Barometer
17 June 2013
Additional Information
Prior to your analysis of the material prepared by Bank Handlowy w Warszawie S.A., please be informed that:
This commentary has been prepared by Bank Handlowy w Warszawie S.A. (hereinafter referred to as the “Bank”).
Market commentary preparation and publication does not fall within the scope of broking activities within the meaning of
Article 69 of the Polish Act on Trading in Financial Instruments, dated 29 July 2005.
This commentary has been prepared by reference to available, reliable data, with a proviso that the Bank has not been
authorized to assess the reliability or accuracy of the information serving as the basis for this publication. Considering
the preparation method, the information contained herein has been processed and simplified by the Bank. Therefore, it
may be found to be incomplete and condensed compared to the source materials.
The information presented herein shall be used for internal purposes, exclusively. It shall not be copie d in any form
whatsoever or disclosed to third parties.
Neither the commentary nor the information contained herein shall be distributed in any other jurisdiction where such
distribution would be in violation of the law.
Any opinions and conclusions presented in this publication are valid as of the date hereof. The information provided in
the Bank’s commentaries does not take into account the investment policy, financial position or the needs of a specified
recipient. Therefore, in the context of the investment decision-making process, it may not be suitable for all investors
using the materials produced by the Bank. The Customer’s investment decision should not be made solely on the basis
of the commentaries prepared by the Bank.
While making a decision on the purchase or sale of securities or other financial instruments, the Customer ought to
consider the risk inherent in the investment decision-making process, including, in particular, the risk of changes in the
price of the financial instruments affected by the aforementioned decision, contrary to the Customer’s expectations, thus,
the Customer’s failure to earn the expected profit and even a loss of the invested capital.
Investment products shall only be offered to holders of bank accounts maintained by the Bank.
Investment and insurance with investment component shall only be offered to holders of bank accounts maintained by
the Bank, whereas selected products shall be made available only to holders of the Citibank master credit card.
Insurance and investment products, including investment funds, which may be purchased by the Customer through the
Bank, are neither a deposit nor an obligation, and they are not guaranteed by the Bank or any of its related parties
operating within Citigroup, save for such investment products which may be issued by the Bank or its Citigroup related
party. For investment products, principal and/or interest protection (if applicable) constitute the obligation of the
investment product issuer.
Investment products involve the investment risk, including the risk of losing the invested capital. While making a decision
on the purchase or sale of an investment or insurance with investment component product, the Customer ought to
consider the risk inherent in the investment decision-making process, including, in particular, the risk of changes in the
price of the financial instruments affected by the aforementioned decision, contrary to the Customer’s expectations, thus,
the Customer’s failure to earn the expected profit.
Insurance products with investment component involve the investment risk, including the risk of losing a portion of the
invested capital. Claims under the insurance contract shall be secured by the Insurance Guarantee Fund in accordance
with the Polish Insurance Guarantee Fund Act. This denotes that if the Insurer becomes insolvent in such circumstances
as specified in the aforementioned Act, the Insurance Guarantee Fund shall satisfy a portion of claims filed by eligible
individuals under life assurance contracts, representing 50% of their receivables, no more, however, than the PLN
equivalent of EUR 30,000.00.
The previous performance of investment funds, investment portfolios, stock market indices, foreign exchange rates and
unit-linked funds on which the yield on the investment may be conditional, do not constitute a guarantee of their
performance in the future.
While making investment decisions at the Bank or another institution, Customers should consider asset concentration,
understood as a substantial share of an investment product of a specified entity or issuer, or of a specified asset class in
the investment portfolio. The exact level or the maximum percentage share of the respective investment products or
18
Investment Barometer
17 June 2013
asset classes suitable for each Customer may not be specified precisely. Asset concentration may generate an
increased risk compared to a diversified approach to financial instruments and their issuers.
The Customer should aim at diversification, understood as proper combination of a variety of financial instr uments in the
portfolio, with the objective to reduce the global risk level.
This material has been published for information purposes only. It shall not be regarded as an offering or encouragement
to purchase or sell securities or other financial instruments. This commentary is not intended as an investment or
financial analysis, or another general recommendation with respect to transactions involving the financial instruments
referred to in Article 69.4.6 of the Act on Trading in Financial Instruments, da ted 29 July 2005. This commentary shall
not be considered an investment recommendation. Neither shall it be regarded as a recommendation within the meaning
of the Regulation of the Minister of Finance concerning information which constitutes recommendation s with respect to
financial instruments or their issuers, dated 19 October 2005. The Customer shall be liable for the outcome of their
investment decisions made on the basis of information contained herein. The Customer’s previous investment profit
earned based on the use of the Bank’s materials may not be regarded as a guarantee or serve as the basis for a
conclusion that similar profit may be generated in the future.
The author of this publication hereby represents that the information contained herein r eflects their own opinions
accurately and that they have not been remunerated by the issuers, directly or indirectly, for presentation of such
opinions.
This material reflects the opinions and knowledge of its authors as of the date hereof.
Additional information is available at the Bank’s Investment Advisory Bureau.
The Bank’s business activity is overseen by the Polish Financial Supervision Authority.
Bank Handlowy w Warszawie S.A. with its registered office in Warsaw at ul. Senatorska 16, 00-923 Warszawa, entered in the Register
of Entrepreneurs of the National Court Register by the District Court for the capital city of Warsaw in Warsaw, 12th Commerci al
Department of the National Court Register, under KRS No. 000 000 1538, NIP 526-030-02-91; the share capital is PLN 522,638,400,
fully paid-up. Citi Handlowy, Citigold and Citigold Select as well as the Citi logo are registered trade marks of Citigroup Inc.
19