Karolina Wysota, money.pl: The stock market is said to be a step ahead of the economy. When I look at the major indices of the world from last year’s perspective, I can see that they glow red. Have we entered a bear market, i.e. long-term falls in stock prices?
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Jarosław Niedzielewski, Director of the Investment Department of Investors TFI: many experts and investors use this word to describe what is happening in the markets. In my opinion it is too early to tell. A true bear market goes hand in hand with a recession, and that hasn’t happened yet. The economic recession is heralded by factors that will make it possible to distinguish between recession and ordinary slowdown.
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Fall in employment, increase in unemployment and worsening of the results of listed companies. We had a recession with 20% unemployment in Poland in 2001-2003. At that time it was difficult to invest in the stock market. Then we had the Eldorado, which lasted until the financial crisis broke out in 2008. It mainly affected the United States and Western Europe. In Poland, from an economic point of view, the recession turned out to be relatively mild. The rise in unemployment did occur, but it was lower than in the United States, not to mention Spain or Greece. It could have been a lot worse.
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At the time, we had a bear market.
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There was a bear market and it was solid. Investors around the world panicked because the financial system was about to collapse, it was hard not to succumb. As elsewhere, we have struggled with the bursting of the housing bubble. Some Polish companies almost benefited from currency options after the zloty depreciated dramatically against the major currencies. Fortunately, our economy started to recover fairly quickly, as did the stock market.
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Now the zloty is also weak.
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But not as weak as it was then.
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Some experts are surprised that the central bank does not intervene on the zloty issue. How do you think?
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I don’t think action is needed at this time. There is no point in selling off the dollars we have in reserves to strengthen the zloty exchange rate. Especially since each intervention triggers the reaction of the other party. I mean global investors who, expecting a currency to weaken, play against it. It was on this, assuming that in 1992 the British central bank could not resist the pressure and free the pound, George Soros won the billion dollars.
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When describing the status of our currency, we should primarily look through the prism of the euro, which is closest to us when it comes to trade. In general, the relationship between the two currencies should reflect their purchasing power, which is affected by inflation. Therefore, given the fact that our inflation is double, and in one moment it could be three times higher than Europe’s, this 10% weakening of the zloty against the euro in recent months should not be considered something unusual.
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The relationship between the zloty and the dollar, which is the main settlement currency of energy commodities, is different, as it has appreciated very much all over the world, which is also increasing the inflationary pressure in Poland. Since Poland, a relatively small country, we are unable to intervene in a way that changes the economic situation of the dollar in the world, so I think it makes no sense to intervene now.
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Going back to the stock market situation, what do you think these several months of downturn are, if they are not going down?
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I fear that in retrospect they will be treated as the first stage of the bear market. However, there is still a shadow of hope that the declines so far turn out to be a correction (a temporary change in trend – ed), similar to that of the end of 2018. I estimate this scenario at 30%.
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What caused the decline then?
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More or less like now. The Fed tightened its monetary policy in the United States, raising interest rates and selling off bonds with yields above 3%. (ten years). Major US indices were down and investors feared the companies’ high valuations. The Nasdaq lost nearly 25% in three months and the S&P nearly 20%. It might have seemed like a bearish at the time, but today we know it was just a correction, because three months after hitting bottom, the tech companies index hit a high again. This year, the declines lasted six, not three months (counting to the June lows on the Wall Street indices), despite the 20 percent drop in the S & P500 index. it is not enough to jeopardize a true bear market.
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What if the negative scenario is realized, which is the one in which you put 70 percent. for a recession?
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As mentioned above, unemployment is an accompanying factor in the recession. Global data shows that in the United States, Europe and Poland it is historically low. Most economists say the labor market has been strong and will remain strong because the pandemic has strengthened it. I’m not so sure. I believe the situation in this regard can change dramatically and suddenly, just as the inflation narrative has changed. At first it was said that it would be temporary. Late last year, this belief began to change rapidly. On the other hand, an almost revolutionary change took place in August of this year. Jerome Powell, chairman of the Federal Reserve, said in his speech at the Jackson Hole central bankers symposium that bringing down inflation was a priority, even at the cost of rising unemployment. Such words have not been spoken in recent decades.
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So you expect a recession. How deep?
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It has been missing for about a dozen years (not counting the economic meltdown of the pandemic), it must finally arrive. Looking at the weakening of the Chinese economy and the inability to recover, and the weakening of the sector globally, I conclude that a recession could come next year. The first harbinger of labor market problems may be the disappearance of job advertisements, of which there are still many. Employment cuts by companies in a specific sector will be significant, which will later spread to other areas of the economy as a ripple effect. There are already some problems with employment in the United States.
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Are you talking about tech companies?
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Yes. During the year, many companies in this industry, particularly those that grew from the wave of real-to-virtual transition intensified by the pandemic, fell by 80-90%. These companies have lost the possibility of easy and cheap financing and their business is not developing as fast as expected. Starting in the spring, they lay 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.
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When can a bear market go down?
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By analogy with past recessions, I think a downside low caused by a real downturn in the economy may not come until the middle of next year, assuming the recession starts in early 2023.
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The rest of the article under the video
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See also: Extravagant state aid. “There is a flaw in the idea of the government”
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The weakest sector of the Polish stock market at the moment is …?
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At the moment, banking. Worldwide, probably no sector has fallen by more than 50 percent, and Polish banks have. Profits in the sector will decline by more than half of what was expected at the beginning of the year. This is mainly for regulatory reasons. The fuel and energy sectors have also recently weakened for a similar reason. The closer winter approaches, not to mention next year’s elections, the more we can expect regulatory burdens that impact the perception of many listed companies. Gas and electricity prices and government action in relation to this energy crisis could still be the main themes in the coming months.
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Is there any interesting sector among listed companies?
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When viewed through the price prism, this is the banking sector. Stocks are so cheap …
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I don’t know if it’s today, but the next 6-9 months is worth considering. The downward trend, caused by credit holidays among other things, will eventually have to let go. You cannot conduct a financial business with such conviction that you have to pay extra for the business. Otherwise, the banks will not want to lend, they will prefer to buy bonds. Such a great interference in the activities of the financial sector is like pouring sand into the ways of the economy. It can have unforeseen and dangerous consequences.
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Where to find a safe haven for savings other than retail treasury bills and bank deposits?
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When it comes to instruments with a similar risk profile, it is worth considering funds that invest in floating coupon bonds and next year (in a recessionary scenario) in fixed coupon bonds. The profits of this type of funds should be higher than those of investments, although the variable value of the unit must be taken into account, which is not the case in the case of investments.
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