- HCM Value Creation
- Significance of women
- Effective company sale
- Investor’s contribution to building value
- Building a Team
- How to Get an Investor
- Jak dobrze sprzedać firmę
- Jak dobrze kupić firmę
- Specyfika rynku buyoutów we wschodzącej Europie
- Rynek fuzji i przejęć w Europie
- Risk Mitigation for BAs
- Commercialization Process
- HCM Contrarian Forecast
- Conversation with Chancellor
HCM Contrarian Forecast
In 1990, HCM was unique in believing that investing in Central European, especially Polish, companies could bring high returns to savvy investors. Our conviction was based on the insight into the Polish economic history as well as Polish entrepreneurship and hunger for knowledge combined with my experience of both the democratization and market reform process in Spain, where I lived from 1981 to the end of 1986. History has proven me right. Central Europeans surpassed all expectations, including their own:
Nowadays, CE has a quick and healthy growth under its belt. Polish GDP still grew at 2.9% YoY in the 4th quarter of 2008. Poland is forecasted to be the country with the highest economic growth in theEU. In addition, for foreign investors it makes sense to take advantage of the current weakness of the PLN (it fell from PLN/€3.7 and PLN/.7 to 4.7 and 3.7, respectively since July 2007) before it goes back to its long-term appreciation path.
Now, I believe again that the current, unprecedented crisis has created another opening for smart money. Research has proven that funds created in times of recession are the best vintage in terms of IRRs (over 30%). Funds and banks have either stopped, delayed or become more stringent in their investment and credit decisions. Now, even good quality firms or their owners suffer from lack of liquidity, while many listed companies trade at or even below their NAV. Therefore, sellers will increasingly accept low valuations creating a rare investment opportunity. However, high credit spreads and low returns on Treasuries will in time make capital flow back to strong borrowers who will become less accommodating.
Last months saw lots of redemptions and NAVs were reduced by a significant decline in valuations. The current volatility will persist for some time. Since the last large crisis of 1987, which I personally observed on the floor of the NYSE, there have been 10 (longer) bull and (shorter) bear markets creating opportunities for value investors: 1987 - an overvalued market and program trading lead to a stock market crash; 1990 - the Gulf War begins and Japan’s stock market bubble ends; 1997 – the collapse of Asian currencies; 1998 - Russia defaults and Long Term Capital Management crashes; 2000-2002 - the Internet bubble, an overvalued market, recession, corporate malfeasance; 2008 - the global sub-prime and LBO crisis.
I believe that the period 2009-2010 (depending on geography and sector) will mark the end of the recession in the real economy and the capital markets will start to discount this recovery approximately 6 months ahead of time beginning the next bull market or even a bubble due to the gigantic amount of liquidity pumped into the system. This liquidity, currently in the vaults of the banks, will be released when fear dissipates.
Emerging Markets, CEE and Poland
Interest rates are approaching zero in the US and other mature markets, while they are still attractive in the EMs. Credit writedowns have reached approx. USD700bn in the US and USD250bn in Europe, while they are virtually zero in the EM. The IMF estimates additional bank asset write-downs of USD470-530bn in the US alone. Therefore, I believe, as does Mark Mobius, that the reversion of the current trend will happen in the EMs first. They have the best macro situation (growing economies, significant reserves), lowest valuations and the highest yields.
In the 1980’s, when I worked on Wall Street, I have experienced the decoupling among the EMs and between emerging and mature markets. It can happen again now. A form of capitalism resistant to periodic shocks has not been discovered yet. Therefore, it is the former inhabitants of absurd, soviet “socialism” which was a continuous crisis, who are best prepared to survive this shock and to start the next phase of growth.
According to the secret memorial of Hitler sent to Himmler on March 4th, 1944, Poles are the most intelligent nation in Europe combining high intelligence with extraordinary wits (..) stemming from centuries of political oppression. I believe that we can do better than other countries of CEE.
EMs, including Poland in Europe, that have manageable upcoming debt repayments as well as external and public debt, good savings, substantial foreign currency reserves and controllable budget and current account deficits are more resilient during the crisis and likely to bounce back faster once confidence and credit return to the mature markets.
Poland, the CEE hub, offers an emerging market growth at a developed market risk. With a quick convergence with the EU (including the EU’s legislative framework), planned entry into the Euro zone, improving corporate governance, maturing democracy, continued economic growth, fiscal rectitude, declining inflation and real interest rates, strong capital markets (last year, in terms of the IPOs, the WSE was the most active stock exchange in Europe just after the LSE) as well as vast human resources (the 6th most populous country in the EU with a multimillion diaspora on all continents), the Polish market is attractive on a risk-adjusted basis for investment over the medium to long-term at very low valuations. As of March 9th, 2009, the WIG index has dropped 66% from the peak in summer of 2008, while the average PE for the market fell from 18x to 9x.
The recession has been deep, but I believe that as in other recessions, the recovery will be strong and, despite opinions of many pundits, will resemble more a V (with cumulative returns over 2 following years of 50% - 130%) than U or L shape due to lower commodity prices, fast and coordinated fiscal and monetary stimuli from governments and central banks, and last but not least the human, very short memory.
If I am right, there is a real danger that companies, PE funds, banks and other participants of capital markets waiting too long with their investment decision will miss the coming upside. Therefore, I believe that even the early investment decisions of Warren Buffet will again prove him right.
"We clearly underestimated the depth & duration of the global financial crisis & its implications on economic growth & commodity demand." - US analysts.
"A form of capitalism resistant to periodic shocks has not been discovered yet. As a consolation we can add that socialism used to be an enormous, continuous crisis."
"Simple rule dictates my buying: be fearful when others are greedy & be greedy when others are fearful & most certainly, fear is now widespread."
Bloomberg , Grzegorz Siemionczyk 14-09-2009
Bloomberg, By Rita Nazareth, 15-09-2009
Bloomberg, By Scott Lanman and Craig Torres, 15-09-2009