The Truth Behind Poland’s Growth Surge
Several media organizations blasted President Trump last week for his about-face regarding NATO.
During his presidential campaign, Trump called NATO’s military presence “obsolete.”
But last Wednesday, Trump held a press conference with NATO Secretary General Jens Stoltenberg, where he called the organization a “bulwark of international peace and security.”
“I said it was obsolete. It’s no longer obsolete,” said Trump.
Coming from Trump, that essentially amounts to a love letter to NATO.
He even altered his stance on Russia. Amid concerns regarding Russia’s backing of Syrian President Bashar al-Assad, Trump admitted that “we may be at an all-time low in terms of a relationship with Russia.”
The abrupt reversal shows that his stance on foreign policy is beginning to evolve and he’s likely trying to repair ties with EU member nations.
But there’s one European country that needs no encouragement to get on board with Trump’s policies — Poland.
Like Trump, Poland’s conservative ruling party is nationalistic and resistant to the EU. And the country has backed Trump more than any other EU member.
Polish government sources recently told Reuters that the country hopes to host Trump for short visit in July. They believe the meeting with Trump will trigger “a significant development for Poland’s image abroad.”
I asked senior analyst Martin Hutchinson to dig in to see if the situation in Poland warrants any investment attention.
Check out his full analysis below.
Ahead of the tape,
Chief Investment Strategist, Wall Street Daily
Poland Rises Amid Stagnant Growth in Europe
Most of Europe is an investment desert.
Productivity growth has averaged well under 1% annually since 2007.
In fact, growth has been exceptionally sluggish for the last decade — driven by three contributing factors…
- Stifling regulation at the EU level, encouraged by socialist local governments.
- Deflationary effects of the euro.
- Uncompetitive wage rates.
Poland seems to have risen despite the greater downtrend in Europe, however.
The flexibility of its own currency and competitive wages have combined to give the country a healthy growth rate.
Let’s dig in a bit more to see why Poland deserves your attention right now…
A Stone-Cold Bargain
Poland marked itself out from its Eastern European neighbors at its 2005 election.
At the time, pro-market parties came both first and second. Socialists were relegated to 11% of the vote, a distant fourth.
Since Eastern European electorates like throwing their governments out regularly, this was good news. They could now do so without bringing back socialism.
Since 2005, the two leading center-right parties, Law and Justice and Civic Platform, have alternated in power. The left had fallen well down into single digits at the latest election in 2015.
The current Law and Justice government is basically Trumpist — strongly nationalist and opposed to the EU bureaucracy, immigration and globalism generally.
Now, since 2005, Poland’s governments have done a pretty good job with the economy.
In fact, since 2006, Polish productivity has increased by 2.5% annually — compared with 0.8% annually for the EU as a whole and 1.3% annually for the United States.
The 2008–09 downturn was much less painful for Poland than for many other countries. That is because the zloty exchange rate absorbed the strain, declining by some 30% and enabling Polish output to be maintained.
Currently, the Polish economy is chugging along at a decent rate. Moody’s recently upgraded its forecast for 2017 growth to 3.2%, from 2.9%.
Plus, the economy continues to benefit from its independence from the euro. The central bank has set zloty interest rates at 1.5%, compared with to a three-month interest rate of minus 0.33% in the eurozone.
That means Polish capital allocation is less distorted by “funny money” than in the eurozone countries — almost certainly one reason why Polish productivity growth has been so decent.
The current government has instituted a subsidy for families that reflects its priorities and is cautious of multinational investment (rightly so, in my view). But it’s otherwise keeping public spending under control and remaining friendly to growth.
The Economist projects that Polish growth will continue around 3% in 2018, which is very good for a country with almost no population growth. Consider, for example, that the U.S. GDP growth rate of 2% is really 1% per capita.
That makes the Polish stock market a stone-cold bargain, since it’s currently trading at around 12.5 times earnings, compared with 26 times earnings for the Standard & Poor’s 500 index.
So we’d be getting three times the per capita growth of the United States for half the P/E. I’ll take that anytime.
So how do you benefit?
Easy Way to Diversify Outside the U.S.
While a number of Polish shares are listed on London, few of them trade in New York.
That makes the best vehicle for Poland investment a fund. In this case, take a look at the $240 million iShares Poland Capped ETF (NYSE: EPOL).
This fund attempts to match the performance of the MSCI Poland IMI 25/50 Index. (The fund is capped so that no single share can represent too large a percentage of it.)
The fund’s holdings provide a cross-section of the Polish economy, with financial services representing 43% of the portfolio, energy 18% and basic materials 13%.
I would normally be concerned at the high percentage of financial services, but with Polish interest rates set independently and a slump in the zloty a recent memory from the last downturn, Polish banks are less likely to get in trouble than in a funny-money economy.
The average P/E ratio of the portfolio is 12.4. Its expense ratio is a reasonable 0.64%, and the yield is 1.8%.
Bottom line: Poland gives you a diversification from both the U.S. and the mistakes of the central EU bureaucracy. It’s growing fast, and it’s cheap. Definitely adds up to a buy rating in my book.
If you do choose to purchase the Poland fund, I wouldn’t pay any more than $24 per share.
Senior Analyst, Wall Street Daily