High growth and high potential, two qualities you’d associate with the celebrated emerging markets like Thailand, Vietnam, India. The former Soviet state of Poland? Less likely, but nonetheless its performance has been explosive in 2017. Indeed, looking at the best performing trackers of the year to date I-Shares MSCI Poland stands tall, having achieved a not insignificant +27.5%.
Unlike the success of the tracker, Poland’s success has not been overnight, with gradual and consistent annual GDP growth of 4.6% between the break-up of the Soviet Union in 1991 and the global recession of 2008. So what’s changed to get its markets moving?
At first glance, the answer is unclear. Growth remains consistent, if unremarkable, with the World Bank predicting GDP growth of 3.3% in 2017. The strength of the Polish Zloty against the US Dollar has helped, with the Polish Zloty appreciating 7.8% since the turn of the year. Yet this is just a single factor in its success.
Nick Vardy, an Associate of The Adam Smith Institute in London and keen proponent of the investment appeal of Eastern Europe points to the value in the region and an awakening of consciousness in the international investor:
“Eastern European Stock Markets are amongst the cheapest in the world…US stocks are as expensive relative to the rest of the world as they have ever been on a Cyclically Adjusted Price Earnings (CAPE) basis.”
On this basis, he expands, the S&P 500 currently trades at 25 times trailing earnings, with Emerging Europe just above 8. In increasingly uncertain times investors are looking abroad to less traditional markets for value and Poland, as well as the rest of Eastern Europe, seems a logical and enticing choice.
Poland’s Competitive Advantage
The logic of this investment is aided by two key intrinsic factors, an incredibly competitive cost of labour and an educated workforce. Whilst Poland cannot offer the same costs of labour of some of the Asia Pacific’s emerging markets, the cost of labour for Polish employees is only a quarter of that of Germany. As long as this holds firm, Poland’s strategic location in Central Europe will continue to provide an attractive location for European companies to locate manufacturing and food processing facilities.
In addition, Polish businesses can find a workforce in which 22% of the population aged 24 or above have some form of tertiary education and the sixth highest levels of English language proficiency in the world. McKinsey recently highlighted the “come for the savings stay for the quality” approach businesses are taking with Poland.
Google has recently set up a hub for entrepreneurs called Campus Warsaw and there remain further signs Poland is becoming an easier place for transnational companies to do business. Between 2009 and 2014 Poland progressed from 76th to 32nd in the World Bank’s ease-of-doing business rankings. Poland is open for business.
A Burgeoning Domestic Market
Nevertheless, while international expansion is key to Poland’s success, internal demand is robust, to the point where it was largely credited with Poland being able to resist the recessions caused by the global financial crash (Poland did not enter recession at all). Indeed GDP purchasing power growth per capita as a percentage of Western European GDP almost doubled between 1991 and 2013 from 32% to 60%. In the same period, this far outstripped its Eastern European neighbours, Czech Republic (65-82), Hungary (48-55), Bulgaria (38-40) and Romania (29-35). This has a snowball effect. As the gap narrows with Western Europe, Poland will become less dependent on that international investment, with a domestic market which will insulate it better from macroeconomic influences. It is submitted this will reduce an element of the risk of the investment.
Clouds on the Horizon
This all said, Poland without doubt faces challenges over the coming decades. Like all European countries, an ageing population will put strain on public services, with (as McKinsey notes) a “shrinking tax base being accompanied by increasing demand for healthcare”.
Alongside this Poland’s international trade would be put under threat by any EU disintegration with its low cost labour base facing added competitive pressure from Asia Pacific’s emerging markets, as Poland is likely to face similar trade tariffs of its oriental competitors.
This accepted, Poland possesses inherent advantages both as to cost and as to its strategic location as a market within 1,000 kilometres of over 200 million European consumers which will remain relevant into the distant future. Perhaps now’s the time to have a look at Poland. If we’re in a “long overdue” bull market in Emerging Markets as Nick Vardy boldly predicts then don’t bet against Poland being one of its major winners.