Karolina Wysota, money.pl: The stock exchange is said to be one step ahead of the economy. When I look at the world’s leading indicators from last year’s perspective, I can see that they are glowing red. Did we enter a bear market, i.e. long-term declines in stock prices?
Jaroslav Nidzielowski, Director of Investments at Investors TFI: Many experts and investors use this word to describe what is happening in the markets. In my opinion, it’s too early to say that. A true bear market goes hand in hand with a recession, and that hasn’t happened yet. An economic downturn portends factors that will make it possible to distinguish a stagnation from a normal slowdown.
Reducing employment, increasing unemployment, and deteriorating the results of listed companies. We had a recession with 20% unemployment in Poland in 2001-2003. It was difficult to invest in the stock market at that time. Then we had the El Dorado, which lasted until the outbreak of the financial crisis in 2008. It mainly affected the United States and Western Europe. In Poland, from an economic perspective, the recession turned out to be relatively mild. There was an increase in unemployment, but it was lower than in the United States, not to mention Spain or Greece. It could have been much worse.
At that time, we had a bear market.
There was a bear market and it was solid. Investors around the world panicked because the financial system was on the verge of collapse, and it was hard not to give in to it. As elsewhere, we struggled with the bursting of the real estate bubble. Some Polish companies have almost benefited from currency options, after the zloty fell spectacularly against the major currencies. Fortunately, our economy is starting to recover very quickly, as has the stock market.
Now the zloty is also weak.
But not as weak as it was at the time.
Some experts are surprised that the central bank did not interfere in the zloty issue. how do you think?
I don’t think there is a need to intervene now. There is no point in selling the dollars we have in reserves to boost the zloty exchange rate. Especially since each intervention provokes the reaction of the other party. I mean global investors who anticipate currency weakness, are playing against it. On this basis, assuming that the British Central Bank in 1992 could not stand the pressure and free the pound, George Soros earned a billion dollars.
When describing the state of our currency, we should look primarily through the prism of the Euro, which is the closest to us when it comes to trading. In general, the relationship between the two currencies should reflect their purchasing power, which is affected by inflation. Therefore, taking into account the fact that our inflation is twice as high, and at a moment may be three times greater than in Europe, this 10% weakening of the zloty against the euro in recent months should not be considered anything unusual.
The ratio of the zloty to the dollar, that is, the main currency of settlement of energy goods, has risen significantly all over the world, which also increases inflationary pressure in Poland. As Poland, which is a relatively small country, we cannot intervene in a way that will change the economic situation of the dollar around the world, so I think there is no point in intervening now.
Going back to the situation in the stock markets, what do you think of these many months of declines, if not declines?
I’m afraid that later they will be treated as the first stage of a bear market. However, there is still hope that the declines thus far will prove to be a correction (temporary change in trend – editorial note), similar to those at the end of 2018. I value this scenario at 30%.
What then caused the decline?
Almost the same as now. The Federal Reserve tightened its monetary policy in the United States, raising interest rates and selling bonds with yields above 3%. (Decade). Major US indices were falling and investors were afraid of the high valuations of companies. Nasdaq lost nearly 25 percent in three months, and Standard & Poor’s – nearly 20 percent. At the time, we might have looked like we were dealing with a downtrend, but today we know it was just a correction, because after three months of bottoming, the tech index has topped again. This year, the declines lasted six months, not three months (counting back to June lows on Wall Street indexes), however, the S&P500 is down 20 percent. It is not enough to prejudge a real bear market.
What if the negative scenario comes true, i.e. where you put 70 percent. for slack?
As mentioned above, unemployment is a factor accompanying recession. Global data shows that this percentage is historically low in the United States, Europe and Poland. Most economists say the job market has been and will remain strong because the pandemic has only made it stronger. I’m not sure about that. I think the situation in this regard can change dramatically and suddenly, just as the inflation story has changed. It was initially said that it would be temporary. At the end of last year, that belief began to change rapidly. However, a semi-revolutionary change occurred in August of this year. In his speech at the Central Bank Governors Symposium in Jackson Hole, Federal Reserve Chairman Jerome Powell said the collapse in inflation was a priority, even at the expense of rising unemployment. These words have not been spoken in decades past.
So you are expecting a recession. How deep?
It’s been gone for a dozen or so years (not counting the pandemic economic meltdown), it should finally come. Given the weakness and inability of the Chinese economy to recover, and the weakness of the industry around the world, I conclude that a recession may come next year. The first harbinger of problems in the labor market may be the disappearance of advertisements for new jobs, of which there are still many. Hiring cuts by firms from a particular industry will be significant, which will later spread to other areas of the economy as the knockout effect. There are indeed some problems with employment in the United States.
Are you talking about technology companies?
yes. During the year, many companies in this sector, especially those that emerged from the wave of transition from reality to virtual, which was intensified by the outbreak of the epidemic, declined by 80-90 percent. These companies have lost the possibility of easy and cheap financing and their businesses are not developing as quickly as expected. Starting in the spring, they laid off workers. Something like this happened two decades ago, after the Internet bubble burst. After a few months, the problems of IT companies and related industries began to spread to other areas of the economy.
When can a bear market go down?
Compared to previous recessions, I think the downward trough caused by the real downturn in the economy may not come until the middle of next year, assuming the recession begins in early 2023.
The rest of the article is under the video
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The weakest sector of the Polish stock exchange at the moment is …?
At the moment, banking services. Worldwide, perhaps no sector has fallen more than 50 percent, which is what happened in Polish banks. The sector’s profits will be more than halved compared to what was expected at the beginning of the year. This is mainly for regulatory reasons. The fuel and energy sectors have been weakening recently for a similar reason. As we get closer to winter, not to mention next year’s elections, we can expect more regulatory burdens affecting the perception of many listed companies. Gas and electricity prices and government actions regarding this energy crisis may remain the main topics in the coming months.
Is there an attractive sector among the listed companies?
When viewed from a price perspective, this is the banking sector. Stock is very cheap…
I don’t know if that’s the case today, but in the next six or nine months, it’s worth looking into. The downward trend caused, inter alia, by the credit malfunction, will finally have to give up. You cannot run a financial business with such conviction that you have to pay extra for the work. Otherwise, banks will not want to give loans, but rather buy bonds. Such massive interference in the activities of the financial sector is like pouring sand into the patterns of the economy. It can have unexpected and dangerous consequences.
Where do you find a safe haven to save besides retail treasury bonds and bank deposits?
When it comes to instruments with a similar risk profile, it is worth considering the money invested in floating-coupon bonds, and next year (in a recession scenario) in fixed-coupon securities. The earnings of this type of money should be higher than the earnings on investments, although you have to take into account the variable value of the unit, which is not the case in the case of investments.
Carolina Wisota, money.pl . journalist
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