Poland: The Brightest Star In Eastern Europe

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About a decade since its welcome into the EU (May 2004), Poland now has one of the strongest economies in Europe. Unlike many other former Soviet-controlled Eastern bloc countries, Poland took a slow and measured pace to privatization and did not rely on massive borrowing.

Even at the height of the European crisis, Poland had positive GDP growth of around 1.6% (2009). Having escaped the worst of the global recession, Poland is now the 33rd largest country in the world in terms of market capitalization (according to IndexMundi). In fact, the Organisation for Economic Co-operation and Development (OECD) recently forecast Poland’s economic growth will outperform that of the European Union’s largest post-communist members, the Czech Republic and Hungary, through 2015. And it will be the third fastest growing country in Eastern Europe, just behind Latvia and Lithuania, in 2014. According to the European Commission, Poland’s GDP is expected to grow at a rate of 3.2% in 2014 and 3.4% in 2015.

Poland is poised to benefit from domestic demand picking up and public investment rising. This may offset the threat the Ukraine could pose to Poland’s economy by reducing trade flows with Russia and the Ukraine. In addition, inflation appears to be in check with Poland’s central bank target a rate of 2.5%. Also the debt to GDP will fall to around 49.2% this year from 57% in 2013.

In terms of emerging Europe (Central and Eastern Europe, and the Commonwealth of Independent States), Poland is the third-largest and third-most-liquid destination, according to Emeralt Investments, a Stockholm-based bank, as reported in Global Finance Country Report: Poland.

Poland, unlike some of its neighbors (which receive nearly all of their natural gas from Russia), receives only approximately 59% of its natural gas supplies from Russia. It is benefiting, in this regard, from a German pipeline that now pumps natural gas from west to east for the first time.

Poland has a highly-skilled workforce that makes the country very competitive on the world stage, as this highly-skilled workforce is willing to work for comparatively lower wages than developed European countries. However, unemployment has remained stubbornly high, at 14%, and would’ve been higher if many had not left the country to obtain employment elsewhere in the EU. One of the side benefits of being a member of the EU is that many of Poland’s younger population have had the ability to interact with those of other countries through travel and study abroad. Other positives include a GDP of $528 billion, international reserves of $97.7 billion and foreign direct investment of $15.1 billion.

Becoming a member of the EU has given the country a boost. Since 2006, Poland's gross domestic product has increased by more than a third in real terms. About half of this growth in output is attributable to EU investments in infrastructure. EU-funded infrastructure has transformed highways and IT systems. It’s also created about 300,000 jobs and raised living standards for Poland's 37 million citizens. Over this same period, Poland moved up 19 places in the World Bank's ranking of “ease of doing business” and now ranks 55.

Not all is perfect, though, as red tape still hinders growth. The World Bank says an inefficient construction code is one of the most acute problems, noting that a Polish company needs 29 permits to build a warehouse on the outskirts of the capital—an almost world-beating number. In July 2013, the government approved new legislation to simplify the process, which could come into force next year.

At the core of Poland's economic “resistance”—to Soviet-era policies, that is—is the Gielda Papierow Wartosciowych w Warszawie SA, the Warsaw Stock Exchange (WSE). The WSE has more than 440 listed stocks and a market capitalization of more than $177 billion; ranking it #33 in the world. Companies listed on the WSE are well managed, financially transparent and regulated. These companies have a high degree of corporate governance and above-average growth rates. As a sign of its overall health, the WSE had the largest number of IPOs in Europe in 2012 (according to PricewaterhouseCoopers' IPO Watch Europe for 2012).

In addition to the exchange, two other companies in particular embody the best of Poland's transformation. Jastrezebska Spolka Weglowa SA (WAR: PL:JSW) is the largest producer of high-quality coking coal in the EU. It also exports to India and Brazil. In addition to coking coal, a key ingredient for manufacturing steel, the company produces steam coal, which is used in power plants.

Coal has historically been one of Poland's most prominent industries. Although as a global industry, coal has been attacked on various fronts, world consumption of the mineral keeps rising, according to the U.S. Energy Information Administration. KGHM Polska Miedz SA (KGHPF) is a holding company with copper mines, smelters and rolling mills in its portfolio. Europe's second-largest copper producer, KGHM operates one of the globe’s largest mines in Chile and is a large exporter to the U.S., the EU, China, Canada and Chile. KGHM has been focused on paying off debt and now has very low debt. KGHM has been in the news recently as it is seeking a dual listing of its shares or an initial public offering of its Canadian-based business, KGHM International. The Polish government, the single-largest stakeholder in the company (31.79%), has objected and wants to keep one of the most-traded stocks on the Warsaw Stock Exchange as is.

In addition to domestic businesses, Poland is also home to global leaders such as United Technologies (UTX), whose subsidiary, Sikorsky Aircraft, produces its renowned Black Hawk helicopters near Rzeszow. In October, Amazon (AMZN) said it would invest in three new logistics centers in Poland, creating 6,000 new jobs over the next two years.

In addition to these individual companies, there are Poland ETFs and funds available on the U.S. market, including iShares MSCI Poland Capped ETF (EPOL), Market Vectors Poland ETF (PLND) and the DMS Poland Large Cap Index Fund (DIPLX).

Peter Kohli
pkohli@dmsfunds.com | 484.671.3011

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Personal Finance , Insurance , ETFs , Investing Ideas

Referenced Stocks: UTX , AMZN , EPOL , PLND

Peter Kohli

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