Inflation is driving the stock market higher

Although the WIG20 remained above 2000 points for only two days, the hesitation and withdrawal of the bulls did not rule out the bullish trend.

There is no reason to stop the express train, other than a possible reversal of bullish trends on Wall Street. Stock exchanges in Europe and the United States came to our aid, as they began to emerge from the two-month merger process. Increases in New York primarily support the trend related to artificial intelligence, but in general the mood has improved and investors have forgotten the shock of last year – says Jaroslaw Nidzielewski.

The German DAX index reached new records a few days earlier, breaking the record from 2021, and in April the records were set by the Paris Stock Exchange, and in February – by the British FTSE 100.

– The last sessions have disturbed this idyll scene a little, but for now it can be treated as a correction of the upward trend, which has a chance to continue in the coming weeks – predicts Yaroslav Nidzielewski.

Potential 2200 points

In his opinion, the domestic blue-chip index can still increase by 10%.

– If the S&P 500 finally breaks the resistance at 4,200 points, it has a 5 percent chance of entering. 4400 points higher. WIG20 can beat these achievements with a 2,200-point level raise. So far, the blue-chip index has only broken through 2,000 points. (albeit only for a moment), but also during the peak in January of this year, – says Yaroslav Nidzielevsky.

Recent gains in Poland were supported by the zloty, which had been strengthening since April, but in mid-May the apparent trend stalled.

– The strong strengthening of our currency for no apparent reason indicates an influx of capital from abroad, which is usually invested in the largest companies. In this way, WIG20 started chasing sWIG80, who is heading towards new records without any pause – says Jaroslav Niedzelowski.

The small business index is up 22% this year. – Record 2021 lacks about 500 points.

Inflation bonus time

2022 was a year of inflation, with prices rising 9.4% in January, accelerating to 17.9% by October. At the same time, the dollar-denominated WIG20 was the weakest index in the world and fell below 1,400 points.

– If the war in Ukraine had not broken out last year, the Warsaw Stock Exchange would probably have behaved better than the New York Stock Exchange, which lost after the previous boom in technology companies, – says Yaroslav Nidzielewski.

Meanwhile, in 2022 WIG20 companies will have an 80% increase in profits compared to the years before the pandemic.

– Looking at the companies’ results, we were definitely closer to what was happening in Turkey, which was doing very well in the local currency without the risk of war, but at an inflationary premium. Very high inflation meant that corporate revenues and profits were growing there, which investors responded to by raising nominal stock prices. It should be similar in Poland – inflation was the highest for many years, and it also boosted the results of banks, which were very good despite the credit holidays – says Jaroslaw Nidzielewski.

Investors are used to war.

Arguably not much has changed – the war continues, we face elections and banks are threatened with extended credit holidays. However, these risk factors are no longer relevant, they are old and familiar – the war has been going on for more than a year and there is no sign of any quick fix. Investors are used to it, but they also don’t expect an escalation – says Jaroslav Nidzielewski, director of investor investment at TFI

In the past year, the Turkish stock exchange in local currency has grown by 180 percent, with inflation of more than 100 percent, and the WIG20 index has lost more than 20 percent.

– From this perspective, the continuous growth since October can, in my opinion, be treated as a return to the right place, justified by fundamentals. Even if the improvement in earnings is largely due to the illusion of inflation, stock markets are based on nominal values. Of course, the price domestic investors usually pay for the inflationary boom is the need to accept a low level of valuation multiple. For foreign investors, the depreciation of the local currency becomes an additional cost – at least in theory – says Jaroslav Nidzielevsky.

In his opinion, stock prices should follow the results of companies that will remain high, but there is no hope that the multiples will return to historical averages.

– Although the record profits achieved by WIG20 companies in 2022 cannot be repeated quickly, their level this year will not differ significantly from the achievements of last year (the share of companies and individual sectors will be different), and next year it will be similar. This still gives a huge increase compared to the level of results before the pandemic. Meanwhile, WIG20 bids are still about 10 percent lower. Less than in 2019, and in the case of the index containing profits, we found ourselves at the level from the end of 2019. Therefore, there is room for the continuation of the upward trend. We still have the right to chase the fundamentals that reflect inflation-boosted nominal GDP growth. However, there is no hope that we will quickly return the level of valuation multiples (such as P/E) to historical averages. When improving fundamentals is mainly driven by inflation, valuation multiples should be lower than normal, says Jaroslav Niedzelowski.

Recession is still on the horizon

In the first quarter, Poland’s GDP decreased by 0.2% year on year, but at the same time it turned out to be 3.9%. higher than the previous quarter.

– GDP growth in the European Union is expected to fluctuate around zero this year, and this does not prevent European indices from breaking records. Similarly in Poland – real economic growth is close to zero, but the sWIG80 index, which includes small firms, and therefore the most theoretically sensitive to the economic situation, is approaching the historical maximum. As you can see, theoretical stagnation, usually defined through the prism of low or even negative GDP growth, is not a hurdle for stock markets this year, says Jaroslav Niedzelowski.

In his view, stock market gains could be halted by a recession, as unemployment rises and nominal profits fall in companies.

Both of these characteristics of a true recession are still missing in Poland, Europe and the United States. In general, the results of companies this year do not differ from the record levels of last year, and the labor market continues to surprise with its strength and resistance to tightening monetary policy by central banks – says Jaroslav Nidzelowski.

The stagnation is evident above all in the industry – the US PMI has been declining until the beginning of this year and is still below 50 points.

What we have been dealing with over the past year in the global economy are the effects of settling scores with an expansion not typical since the time of the pandemic. The printing of paper money and excessive demand for many commodities in the face of supply chain problems led to overstocking, full warehouses and, as a result, halts to orders and production in many sectors of the industry. Hence the declining PMI indices around the world for a year and transhipment ports operating sluggishly. It takes time for stocks to be cleared from warehouses, which will allow a new procurement cycle to start and industrial production to begin, – says Jaroslav Niedzelowski.

However, this does not mean that we will not have a recession on the horizon soon.

The current rally could be brought to an end by a true full-blown recession, but at the moment there is not enough evidence that it is imminent, although there are many warning signs. Most investors and analysts believe that after the economic difficulties in the first half of this year, the following quarters and next year will bring us obvious economic expansion. Personally, I have some doubts about that, – says Yaroslav Nidzielevsky.

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