Equity and bond market

In the global financial markets, the beginning of 2018 was marked by continuation of very good sentiment prevailing across almost all asset classes in 2017. On 23 January 2018, the WIG index, following the rise in global risk appetite, reached its historic high of 67,529.39 points. The rest of the year, however, was dominated by much worse sentiments on the Polish market. At yearend 2018, the WIG index was down 9.5% y/y, having stopped at 57,690.50 points. The main trading floors in London, Frankfurt and Paris experienced a similar turn of events, having recorded slumps of over 10% y/y. In the United States, the main S&P 500 index ended the year only slightly better with a loss of 7% y/y. The MSCI ACWI (All Country World Index) (composed of stocks from 46 different countries, of which 23 are classified as developed markets and the other 23 are considered emerging markets) dwindled 11.2% y/y in 2018, thus wiping off half the upsurge generated in 2017.

Much like in 2017, the situation on the financial markets was largely affected by the activities of central banks. Investors’ attention was focused in particular on the rhetoric and decisions of the American central bank (the Fed), in particular on as many as 4 interest rate hikes. The last such hike was effected on 19 December (to 2.25-2.5%) and was accompanied by a declaration of two more interest rate hikes in 2019. In parallel, throughout 2018 the Fed kept lowering market liquidity through a quantitative tightening operation, i.e. reducing its balance sheet by restraining the reinvestment of maturing bonds.

MSCI ACWI ($) 2016-2018

Source: www.infostrefa.com, www.msci.com

MSCI Emerging Markets/WIG20

Source: www.infostrefa.com, www.msci.com

Also the European Central Bank announced a reduction in the amount of cheap money in circulation, to be effected by way of termination of its quantitative easing program by the end of 2018 (at the same time announcing no interest rate hikes by the end of 2019 and maintaining the reinvestment of interest and principal from maturing bonds). In August 2018, the central bank of England also raised interest rates (to 0.75%), admitting the possibility of subsequent hikes, in particular in the light of potential turbulence associated with Brexit.

Actions taken by major central banks, aimed at gradual tightening of monetary policy, translated into lower liquidity and more constrained access to cheap money. The first consequence of this was a decline in confidence in high-risk assets, in particular emerging markets securities. The effect of the outflow of capital was intensified by the sharp appreciation of the dollar (between the beginning and end of 2018, the US dollar appreciated against the Polish zloty by 8% to PLN 3.76). The unenthusiastic attitudes towards these markets (the contagion effect) were further exacerbated by serious currency turbulences in Argentina and Turkey. The MSCI index of emerging markets dwindled 16.6% y/y.

The outflow of capital from emerging markets affected also the Polish capital market, as it is dominated by foreign investors (at yearend 2018, their share in this market was 59%). Furthermore, the weakness of the Polish market was also affected by local factors related to financial problems experienced by the debt collection company GetBack and accusations of corruption against the former head of the Polish Financial Supervision Authority (KNF), which had a significant impact on the perceived stability of the banking sector (accounting for the largest chunk of the WIG20 index). As a result, also retail investors (whose share in the market at yearend 2018 was 12%) kept withdrawing funds from share-based assets (equities and units in mutual funds). The sweeping deterioration did not spare the asset management market, either. Equity assets under management stood at PLN 25.4 billion at the end of 2018, compared to PLN 33.2 billion at yearend 2017. This means a decline by PLN 7.8 billion, of which the value of redemptions of participation units in these funds totaled PLN 3.9 billion. Total assets of mutual funds shrank by PLN 22.1 billion y/y to PLN 256.8 billion.¹

Compared to emerging markets, the S&P 500 index, supported by additional appreciation of the dollar, performed much better, setting new records all the way up until September 2018. However, the last quarter of 2018 saw a rapid outflow of capital from the US stock market (at yearend 2018, the S&P 500 dropped 7% y/y to 2,485.74 points). The weaker wrap-up of the year was due not only to the deterioration of sentiments towards the American economy caused by the weakening fiscal stimulus (resulting in a potential slowdown of economic growth), but also to the discounting of the effects of escalating tensions between the United States and China. SECTION 2.3. SITUATION ON THE FINANCIAL MARKETS

WIG20 versus the MSCI EM and DM and S&P500 market indices

Source: www.infostrefa.com, www.msci.com

WIG / Treasury bonds

Source: www.infostrefa.com, www.msci.com

The increasing prices of equities on the US stock exchange (during the first 9 months of 2018) were accompanied by declines in the prices of 10-year US Treasuries, which lasted uninterruptedly until October 2018. Conversely, in the European markets, bond prices were on the increase in response to incoming data that might indicate an economic slowdown in the euro area.

The yields on Polish treasury bonds declined (as their prices increased) along the whole yield curve, with the largest movement recorded on annual and 10-year bonds. Throughout 2018, the yields on 10-year treasury bonds slumped by 49 bps from 3.30% to 2.81%. The yields on 5-year treasury bonds declined by 36 bps and stood at 2.29% at the end of the year, while the yields on 2-year bonds dropped by 37 bps to 1.34% during the year. The yield of Polish debt treasury securities with 1-year maturity fell by 56 bps to 0.91% at the end of the year. The benchmark index of Polish treasury bonds TBSP (fixed-coupon and zero-coupon bonds) improved 4.7% y/y in 2018. SECTION 2.3 SITUATION ON THE FINANCIAL MARKETS

¹ https://www.izfa.pl/dane-statystyczne