Last week on the WSE was very sleepy. The upward break of early January did not continue; WIG and WIG20 were consolidating right above the three local highs of Q4 2009; the bulls were unwilling to move and the bears were similarly slow. As a result, the market has been standing still for some two weeks. Demand for small and mid-cap stocks is stronger for the first time in a long time, but it is nothing major yet. It is interesting to note the relation of sWIG80 and mWIG40 returns to WIG20: if the trend continues, foreign stocks may prove attractive investment targets in Q1 2010.

 

The Polish market is asleep because investors fear that the sluggish uptrend triggered by the rise of the US indices is slowly coming to an end. US bulls are unable to get sturdily on top (maybe except Nasdaq in the second half of December) and stock move very little. Last week, DJIA lost 0.1%, S&P500 0.8% and Nasdaq 1.3%. As a reaction, the Polish indices stood still: WIG20 and mWIG50 gained 0.1%, WIG 0.2%, only sWIG80 closed the week up by 1.7%. Foreign stocks rose 2% on average while the median was -0.6%. The gap results from several spectacular rallies: Olympic rose by 31% during the week; Astarta joined the uptrend and gained almost 16% after six weeks of correction; Silvano was up by over 12%. Last week’s worst performers were Unicredit (-7.6%), Orco (-7.5% after bond holders rejected the proposed debt restructuring), and Warimpex (-4.4%).

 

Investors interested in foreign stocks listed on the WSE heard some interesting news last week. New World Resources sold its subsidiary NWR Energy to Dalkia for EUR122M. CEDC and Remy Cointreau signed an exclusive distribution agreement for Żubrówka in the USA. KBC Securities maintained the “Buy” recommendation for Asseco Slovakia and raised the target price to PLN 30, around 23% above the closing price on Friday.

 

The key driver of the performance of foreign stocks in the nearest future is the investment focus of short-term speculative capital. It seems that the direction of these capital flows has changed in the past trading days: speculative investors are once again turning to small and mid-cap stocks. In this connection, it is important to track sWIG80, the only main index still performing below the 2009 level and the August 2009 local high. The index may test this level in the coming week (sWIG80 is currently only 1% below its last high). An upward break would send an important buy signal. Such a signal would probably have a positive impact on the performance of the foreign stock segment. This, however, requires a positive impulse from the broad market, pulling WIG, WIG20 and mWIG40 out of their current narrow consolidation bands. The correlation with the US market over the last several days of trading suggests that this impulse will not come from the US but rather from the local market. As long as the Polish stock market remains boring and keeps moving within a very narrow band (WIG20 is consolidating within a range of only 50 points), it seems best to postpone investment decisions until a break-out one way or the other triggers a signal.

 

Kernel said last week it signed a call option agreement for a controlling stake in Allseeds Holding. The transaction is worth EUR42M. Allseeds’ business profile is to produce and export oil; its assets include oil extraction plants, cereal elevators, and a transhipment terminal. The conditions precedent of the deal include the approval of the Ukrainian Anti-monopoly Board and a positive outcome of the due diligence currently performed by Kernel.

 

The report triggered a “Buy” recommendation with a target price of PLN 53 (the stock closed at PLN 45.30 on Friday). According to Wood&Company analysts, the deal will be closed at EV/EBITDA below 5. Kernel’s current ratio is ca. 7.4; hence, the positive assessment of the acquisition and the upgrade.

 

The report was also welcomed by investors: the stock broke out of a six-month consolidation and hit a historical high. The door is open to further growth. The duration of the consolidation suggests that the uptrend will last. A sell signal might come if the price dropped below the consolidation ceiling at PLN 44-45.

 

Kuba Sierka

Investment Banking Department

Beskidzki Dom Maklerski S.A.