Macroeconomic conditions and share price of PZU Group
PZU Group is one of the largest companies listed on the Warsaw Stock Exchange and since its IPO, it has been included into the WIG20 index.
In 2010, the situation on the capital markets was relatively favourable. The stock market indices, rebounding after significant declines, were rising, but much slower than in 2009. The upward trend on the stock markets was interrupted by a short but clear correction in the late January and early February and a longer period of regression in May and June due to the increase in global risk aversion because of the onset of the debt crisis in the peripheral economies of the Euro zone. At the end of 2010, the WIG index was 18.8% higher while WIG20 was 14.9% higher compared to the end of the previous year.
In 2011, PZU Group’s share price was influenced by not very optimistic factors impacting the situation on the Warsaw Stock Exchange and global investors’ sentiment for the Euro zone and the Polish market.
Until April, the indices were increasing in parallel to the expected acceleration in global economic growth, but in the second quarter this perspective began to wane. In the third quarter the exacerbation of the debt crisis in the Euro zone, fiscal problems in the US and downgrading of the highest credit rating and revision of GDP projections of that country, contributed to a massive spike in risk aversion on global financial markets, resulting also in a decline of the Polish indices.
Despite the good financial standing of companies and a relatively high GDP growth, the main stock market indices of the Polish market, WIG and WIG20, declined by 20.8% and 21.9%, respectively. Over the overwhelming part of 2011, PZU shares lost less than the market. The closing price of PZU shares on the last trading session of 2011 was PLN 309.00, down by 13.1% from PLN 355.50 on the last day of December 2010. The decisions of investors interested in the Group’s shares were also influenced by the sale of a 10% stake in PZU by the State Treasury and the dividend pay-out for 2010.
In the first half of 2012, the debt crisis re-escalated in the Euro zone. However, in subsequent months, the situation on global financial markets calmed down thanks to the actions taken by the European Central Bank. The willingness to intervene on the bond market, which was announced by ECB in the second half of the year and the arrangements for rebuilding the financial architecture of the Euro zone significantly reduced the probability of disintegration of the monetary union. At the same time, the US continued the "quantitative easing" in the monetary policy. As tensions fell on the financial markets and along with the expectations for the improvement of the global economic situation in 2013, the global stock indices increased. Stock prices in Poland were moving up again. The WIG index rose by 26.2%, while WIG20 by 20.4%.
In 2012, the closing price of PZU shares on the Warsaw Stock Exchange, ranged from PLN 292.10 to PLN 437.20. In the first half of 2012, the changes in PZU share prices did not differ significantly from those on stock market indices, the second half brought significant hikes in the company’s stock price. As a result, on the last trading day of 2012, a share of PZU Group’s stock was worth PLN 437,00, up by 41.4% from the last day of trading in 2011.
In 2013, the main trends in global financial markets were influenced by the Euro zone leaving recession behind in the second quarter and consolidation of the economic recovery in the US, which was additionally confirmed in June by the announcement that "quantitative easing" would be reduced. The flow of capital from the bond market and better prospects for economic growth supported the growth of stock prices.
The year 2013 was not unquestionably successful for the Polish stock exchange. The WIG index increased by 8.1%, but the WIG20 lost 7.0%. The situation on the Warsaw Stock Exchange was also significantly influenced by the developments in the national economy and the disassembly of the second pillar of the pension system.
PZU Group's share prices in 2013 were influenced by the changing behaviour of investors in global financial markets, which, in particular, was driven mainly by the continuation of the easing policy by the ECB and the Bank of Japan, the starting of QE3 reduction by the FED and local issues related to the reform of the open pension funds (OFE). Investors appreciated the very good financial results earned by PZU in respective quarters of 2013. The attractive dividend policy contributed to the increase in the share prices. In 2013, PZU's share price, at the close of trading on the Warsaw Stock Exchange, ranged from PLN 385.00 to PLN 477.9. After mid-March 2013, i.e. after the publication of the PZU’s results for 2012, PZU shares fared much better than other blue chip shares. This trend continued until the end of 2013. The closing price of PZU shares on the last trading session in 2013 was PLN 448.95, up by 2.7% compared to PLN 437,00 on the last day of December 2012.
The major trends on the global financial markets in 2014 were strongly linked to economic developments in the US and the Euro zone. As expected, bullish sentiments persisted on the key stock markets of the world, but growth was much weaker than in 2013. The investors owe the positive developments on the stock markets mostly to central banks. In the beginning of 2014, the US Federal Reserve (FED) started to phase out the quantitative easing program. On 29 October, FED completed the third round of quantitative easing (QE3). Despite the suspension of QE3, the financial markets continued to be driven, among others, by the actions of the Bank of Japan (BoJ), which at the end of October 2014 decided to expand its quantitative easing program by 25-30%.
At the end of 2014, the European Central Bank also increased its monetary policy easing activity. In addition to the activities implemented under the current policy, which was based, among others, on loans granted under the TLTRO program (targeted long-term refinancing operations), another possibility emerged, which involved extension of the asset purchase program to include treasury bonds, similar to the activities taken by the FED. On 22 January 2015, the ECB announced an extension of the asset purchase program to include bonds issued by national governments and agencies from the Euro zone and by European institutions. The total monthly amount of purchases was set at 60 billion Euros (until September 2016 at the least).
The year 2014 posed many local challenges to the holders of Polish shares. National indices came under pressure of events such as e.g. the Russia-Ukraine conflict and the reform of the pension system in Poland.
The beginning of the year brought the termination of pension funds in their current form. On 3 February 2014, PLN 153 million worth of treasury bonds were transferred from pension funds (51.5% of their assets) to the Social Insurance Institution (ZUS). The transfer of treasury bonds from pension funds to ZUS and a reduction of contribution proceeds to open pension funds (OFEs) forced the fund managers to radically change their investment policy, which reduced the demand for Polish shares from the largest investors on our market. In the past, those long-term investors invested a significant portion of their assets in smaller capitalization companies, which in the long run were expected to bring above-average returns due to the illiquidity premium. Now, the investment policy shifted towards the most liquid national and international stocks, at the expense of smaller and illiquid ones. This resulted in a significant difference in the behaviour of stock prices of the largest and the smallest companies represented respectively by the WIG20TR index (which is the WIG20 index taking into account dividends paid by the companies) and the sWIG80 index, which reached approx. 17 percentage points.
The attack of Russia on Ukraine and the entire chain of events that followed – an unprecedented increase in geopolitical risk in Europe since the turn of 1980s and 1990s, the problems of the Ukrainian economy, the sanctions imposed by the West and Russia’s countersanctions, the decline in the Polish exports to the east (especially food) were very significant for the condition of Polish companies (Russia is ranked fifth and Ukraine eighth among our largest export partners) and for the entire financial market in Poland. The decline in stock prices affected mainly the companies operating in Russia and Ukraine. The Ukrainian-Russian conflict can also be linked to the events during the last weeks of 2014 - the collapse of oil prices (-45%, down to USD 107 per barrel), the collapse of the rouble exchange rate (-43% vs. Euro, -32% vs. PLN), a hike in Russian bond yields (from 8% to 13% in the case of 10Y securities). All those factors led to an increased risk on the entire Polish capital market and an outflow of funds from the Central and Eastern Europe region, including Poland, in favour of, among others, the Asian markets. The discouragement with European equities resulted in a strong correction in mid-December 2014.
The low inflation figures were one of the arguments for another interest rate cut by the Monetary Policy Council (MPC) in 2014. After the -50 bps reduction in October, the reference rate was at a historic low of 2%. This naturally supported the bond prices. Since the beginning of January, the yield on Polish 10-year bonds fell from 4.8% to 2.6%. No wonder that in the face of the increased uncertainty (OFE reform, Russia-Ukraine conflict), which affected the investment climate, and increased risk aversion, the investors went back to Polish treasury securities.
In 2014 the bull market continued in bond markets outside Poland. Yields on 10-year US bonds fell from 3% to 2.1%, on German bonds from 2% to 0.6% and on Polish bonds from 4.8% to 2.6%. Bonds were also supported by slower recovery in the global economy and by declines in commodity prices, especially oil.
Despite the difficult macroeconomic conditions in 2014, PZU Group’s stock performed much better than other blue chips (WIG20) or banks (WIG Banks). At the session on 8 September, the price broke the barrier of PLN 500 for the first time (reaching PLN 501.4) and reached a historical maximum (PLN 511) on 4 November. The closing price of PZU Group’s shares at the last trading session in 2014 was PLN 486, marking an increase of 8.3% compared to the price in the previous year.
A number of events that had a considerable impact on the financial markets took place in 2015. In late January, the European Central Bank announced its quantitative easing program and begun to buy treasury bonds of Eurozone states. Consequently, the German 10-year bond yields were decreasing in subsequent months to the lowest historical levels, and temporarily amounted to less than 0.1%. Simultaneously, German stock exchange indices were exceptionally high. Both shares and treasury bonds were more expensive also on the Polish market.
The expected increase of interest rates by the US Federal Reserve in 2015, contrasted with an extraordinary easing of monetary policy in the Eurozone, resulted in a significant strengthening of US dollar versus the common European currency in Q1 2015. The differences in monetary policy and in the perceived economic outlook in the Eurozone and the USA contributed to a larger difference between the German and US 10-year treasury bond yields that reached the highest level in years.
Making the Swiss franc exchange rate free-floating by the Swiss central bank in mid-January was another significant event in early 2015. The minimum EUR/CHF exchange rate of 1.20 was abolished. This decision resulted in a rapid strengthening of the Swiss currency also versus the Polish zloty.
The Monetary Policy Council’s decision to lower the National Bank of Poland reference rate to 1.50% in March 2015, which ended the monetary policy easing cycle, was exceptionally significant for the Polish treasury debt securities with shorter maturity periods.
In late April and early May 2015 atmosphere on the financial markets begun to change fundamentally. Prices of shares and bonds started to drop, especially in Europe. Quieting down the fears of strengthening deflation in Eurozone contributed to a change on the interest rate market. A higher risk aversion on financial markets, i.e. due to the problematic situation in Greece and the Russian-Ukrainian conflict, adversely influenced the stock market situation. The tension escalated in late June 2015 when the Greek Prime Minister A. Tsipras announced a referendum on accepting the terms and conditions of the aid scheme for the country.
In the stormy first half of 2015, the Polish 10-year treasury bond yields reached both the lowest and the highest level of the year. They first dropped from 2.54% to 2.00% at the end of January and then increased to 3.37% at the end of June. In late April and early May the WIG index exceeded the value of 57 thousand points, growing by nearly 12% since the end of 2014. However, its drop in the second half of May and June removed most of the previous increase.
Three key issues influenced the financial market trends in August and September 2015. First of all – the situation in China where the prices on the stock market collapsed in mid- August 2015, causing strong global turbulence. Secondly – a possibility that the European Central Bank would extend and prolong the quantitative easing program which was due to finish by September 2016. Thirdly – it was expected that the Federal Reserve would decide on the potential interest rates increase in the USA, which eventually did not take place in September.
In Q3 2015, the Polish yield curve significantly dropped and flattened. Externally, low yields were maintained as a result of the ECB’s and Fed’s monetary policy, which proved more accommodative than expected. What is more, persistently low inflation in Poland and the expected outcome of Polish election suggested that accommodative monetary policy in Poland would be maintained.
That period proved unfavorable for the stock market. Share prices decreased not only in Poland, but also globally. Initially, the decreases resulted mainly from concerns related to the situation of Greece. They grew stronger along with the deteriorating economic and market situation in China and its potential implication for the global economy, especially „emerging markets”. An additional burden for several companies on the Polish market – especially from the banking sector – were the media announcements of potential statutory changes, which might have negative effects on such companies’ operations (including the so-called financial institution tax) and were likely to be introduced after parliamentary elections in October 2015. SECTION 2.4. Regulations on the insurance and financial markets in Poland.
Decreases in WSE indexes escalated in the last months of 2015. WIG20, an index of the largest companies, reached nearly 1700 points for the first time since 2009. After the peak in May, WIG dropped by nearly 24%. Several factors contributed to that situation. The US central bank increased the federal funds rate by 25 bps in December. That had been the first increase since 2006. The European Central Bank eased its monetary policy in December; however, the scale of easing was narrower than expected by the market. At the same time, the concerns related to the situation on emerging markets grew stronger. Raw material prices were going down. External risks and announcement of regulatory changes to affect e.g. the banking sector proved to be an additional burden for the Polish stock market, especially WIG20 index.