By Anna Koper
WARSAW (Reuters) - Poland's ruling party has set off a new flurry of changes to the leadership of state-controlled companies, putting investors off a stock exchange that beat all emerging markets last year.
The CEOs at nine companies have been changed this year, hitting their share prices and adding to other factors driving the Warsaw Stock Exchange WIG20 (WIG20) down 18 percent in dollar terms after last year's 53 percent rise.
Around 20 senior managers have also been shifted since December, amid signs of infighting within the governing Law and Justice (PiS) party.
The absence from public life since April of its leader Jaroslaw Kaczynski due to health problems has added to the uncertainty. Kaczynski is Poland's political arbiter and author of interventionist policies criticised by the European Union.
The changes have taken place under Prime Minister Mateusz Morawiecki, appointed by PiS in December to try to ease strains with Brussels over the party's judicial reforms.
Morawiecki's background running a bank owned by a foreign firm made some investors think he would sympathise with their position more than his PiS peers. Now they are not so sure.
"Investors do not know what the strategy is," said Marcin Szortyka, head of equities at NN Investment Partners TFI, one of the top five investment funds in Poland, citing uncertainty over potential banking sector mergers, the future of fuel companies and whether a nuclear power plant would be built.
Poland is the biggest beneficiary of EU funds and the EU has threatened to cut funding in its next budget round unless Morawiecki can convince them by late June that the government is not threatening judicial independence.
A separate EU plan to divert some funding from northern European states such as Poland to southern ones tackling a refugee crisis has further clouded the outlook.
Against this challenging backdrop, some investors say the corporate changes are a step too far.
"The market is already complicated enough without that," said Tim Love, investment director of emerging market equities at global asset management company GAM.
"MORE IMPORTANT MATTERS"
In Poland, the state is able to control listed companies even where it does not hold a majority stake, giving it potential sway over 23 stocks on the bourse, 12 of which make up more than 70 percent of the blue chip index.
Five of the latest CEO removals have been at blue chips and there has been little explanation of the moves from either the government or the firms themselves, raising questions over policy and the future of other company chiefs.
PiS had already swept aside the vast majority of appointees of the previous, centrist Civic Platform government at state firms since its return to power in 2015 after an eight-year gap. Personnel changes slowed last year but have now picked up again.
The twists and turns in the share price of refinery PKN Orlen (WA:PKN) illustrate the confusion this has caused.
CEO Wojciech Jasinski lost his job in February, surprising observers since he was known as an ally of Kaczynski.
Two government sources said his refusal to fire colleagues associated with Civic Platform had played a role, as had his reluctance to join a project to build a nuclear power plant.
"Sometimes, changes in managements of state-owned companies are being made in the face of more important matters," said one source, referring to government arguments the nuclear plant will create jobs, reduce emissions and cut the risk of blackouts.
The stock surged 24 percent in 2017 but lost 21 percent after Jasinski's replacement with Daniel Obajtek, who increased the amount of money invested in struggling coal miner PGG in his previous job heading utility Energa (WA:ENGP).
Earlier this month, PKN shares rebounded when the prime minister took control of the refinery, and another, Lotos (WA:LTSP), from the energy minister. One analyst suggested costly involvement in the nuclear plant was now less likely and a linkup with Lotos to create a strong European player would accelerate.
Since then, PKN's stock has dropped again with the revival of uncertainty, and, with it, fears over future cash flow. Neither the company nor the prime minister's office were immediately available to comment on the changes in the board.
Polish stocks cheaper than peers https://reut.rs/2MQhNaL
MORAWIECKI
As finance minister since 2016, Morawiecki has overseen strong economic growth, 4.6 percent in 2017, and last year's stellar rise in the Warsaw index, due in part because Poland did not enact a plan to impose losses on banks over mortgages in Swiss francs which hurt Poles when the zloty currency weakened.
Another reason was a revival in coal prices, which relieved pressure on utilities told to invest in Poland's ailing mines.
Morawiecki has returned some banks to state control, suggested private capital is too weak and cautious and said he will prioritise domestic capital. Questions raised for investors by these statements have been compounded by the CEO reshuffle.
Production problems had already pressured copper miner KGHM (WA:KGH) since the last quarter of 2017, but its shares have dropped around 16 percent since Radoslaw Domagalski-Labedzki was fired as CEO on March 10.
It took over three months to find his replacement, leaving potential sales of foreign assets uncertain in what an energy ministry source said was a fight between various factions in PiS.
"There are three or maybe even four groups involved in this," he said. The energy ministry did not immediately respond to a request for comment.
Sebastian Buczek, CEO of Quercus TFI investment fund said the WSE's rise last year was fuelled by foreign investors who had now moved on. "There are markets that are more interesting," he said, "where fewer unexpected things happen."
SILVER LINING?
Other shares that have fallen since their chief executives left companies this year include Alior Bank (WA:ALRR), coal miner Bogdanka (WA:LWBP), real estate company PHN (WA:PHN) and construction company Polimex-Mostostal (WA:PXMP).
Shareholders are already concerned by the government's use of companies to fund favoured investments.
"An individual investor does not necessarily invest in Tauron (WA:TPE) or Enea (WA:ENAE) shares to take care of the energy security of the country," Grzegorz Zielinski, Poland director of the European Bank for Reconstruction and Development, told Reuters, referring to the utilities' investments in coal mines.
The CEO changes are far from the only factor that has weighed against Polish shares and some see a silver lining in the clouds over the Warsaw bourse.
Swiss bank UBS predicts a revival later this year, citing cheaper valuations, forecast GDP growth of 4.3 percent for 2018 and a budget deficit it expects to be just 0.6 percent of GDP.
"A weak stock market is not a problem as such for Polish macro," said Geoff Dennis, Head of Global Emerging Markets Equity Strategy at UBS Securities, adding that there was little risk to Warsaw's position in global equity market indices although consumer spending or investment could suffer.
Most emerging markets have declined this year, weighing on Poland along with weakness in the zloty currency and diminishing prospects for rate hikes that have pressured bank shares.
The Warsaw Stock Exchange now has one of the lowest valuations among markets included on the MSCI Emerging Markets index (MSCIEF), which rose from $1,160 at the end of December to $1,280 in January before falling back to $1,090.
The blue-chip WIG20 index has a price-to-earnings ratio of 10.99 and the broader index is 11.15, putting it towards the bottom of the index, just ahead of Hungary, Pakistan, United Arab Emirates, Russia and Turkey.