How much can we gain from peace in Ukraine?

When news agencies reported a few days ago that the Americans and Russians were planning a meeting between Donald Trump and Vladimir Putin, possibly even with Ukrainian President Volodymyr Zelensky present, as the US president had allegedly been pushing for, the Polish stock market immediately jumped and the złoty strengthened. Hopes for a breakthrough are growing, as a meeting in Alaska has already been announced for Friday, and even a drop of optimism is enough to fuel the optimism.

Thanks to this, we're seeing something that's not readily apparent to the naked eye: the negative effects of geopolitical risk are visible in the Polish economy, in asset valuations, the cost of capital, and therefore in investments. Stock market valuations are merely a symptom of a broader phenomenon: a reduced appetite for risk. This burden may never disappear, but it is gradually being reduced.

Let's look at the stock market. For the six years ending in 2021, the valuation of Polish companies, measured by the ratio of their share price to the earnings they generate (profits from continuing operations), did not differ significantly from the average valuation in emerging markets. In the MSCI Poland index, this ratio averaged over 13, and in the MSCI Emerging Markets, it was less than 15 (meaning, in Poland, the price was 13 times annual earnings, and in emerging markets, 15 times). However, since the beginning of 2022, a significant change has occurred, with Polish companies starting to be valued relatively much lower. Their average ratio since the Russian invasion of Ukraine was 7.5, while in emerging markets, it was 14.

This means that the valuation of Polish companies relative to their emerging market peers has fallen by an average of one-third since 2022. Let's translate this to their total value. The MSCI Poland index's capitalization is PLN 400 billion, meaning the price of risk represents approximately PLN 130 billion in company valuations. However, if this proportion is applied to the entire stock market, the costs are three times greater. And if applied to the entire economy, they are as much as thirty times greater.

In situations like this, some people write to me: "The stock market isn't the economy!" Of course. But we still have a large enough stock market that its valuations reflect the cost of capital across the entire economy. Even if not 1:1, they're certainly close in direction.

When we look at other valuation metrics, such as the company's price relative to its book value, this disproportion does not increase as drastically from 2022, but the effects of risk are still visible.

Moreover, the burden of risk is visible not only on the stock market. Soon, "Puls Biznesu" will have an article on treasury bonds, in which one of the market experts says: "The ongoing war beyond the eastern border is discouraging some long-term foreign investors. A ceasefire could change the situation, as the yield level on our debt market is very attractive."

Why does the war affect the Polish market at all, if it doesn't ultimately affect our country? There are three possible channels of influence:

1) the basic risk that war will come here one day, although I think it is considered very low,

2) the risk of increased fiscal imbalance and therefore higher inflation, interest rates and exchange rate fluctuations in the long term,

3) the risk of lower economic growth in the long term due to higher energy prices.

Some of these risks are gradually receding, particularly the second and third. Inflation is steadily declining, the złoty has strengthened, and economic growth remains above the European Union average. Therefore, in the second quarter, after a prolonged rally in Polish stock prices, the discount in the valuation of Polish companies is still half of what it was in 2022.

If some kind of agreement were reached in Ukraine that didn't involve Washington throwing the country under the Russian bus, we could gain even more. However, for now, the chances of a positive breakthrough in Ukraine are low. On Friday, at the time of writing, the probability of a ceasefire this year was only 30% on the Polymarket bookmaker market.