22nd September 2015 by Darius McDermott
In the second of my mini series on frontier markets, I’m taking a look at Poland.
It might come as a surprise to some people that Poland is still considered to be an emerging market, let alone a frontier market. It’s the sixth largest economy in Europe, has low levels of public debt and has experienced stable growth throughout the past decade – in spite of the global recession and ongoing eurozone woes. But a frontier market it is.
In the immediate aftermath of the global financial crisis, Polish GDP rose by 2.6% in 2009, compared with a fall of 4.4% for Europe as a whole, and has continued to outpace it by at least 1.5% year on year*.
The economy has established key trading ties, predominantly with Germany, focusing mostly on a diversified manufacturing sector – everything from plant machinery to speedboats. This is aided by a large, low-cost but high quality workforce.
There is also considerable strength in the agriculture sector too, where recent government reforms have enabled Poland to increase food production and export to the European Union and beyond.
Having its own currency, the Zloty, has helped in recent years – like the UK it has avoided the problems associated with being tied to the euro but has been able to benefit from trading with the bloc. They have also had considerable money come into the country from the eurozone, largely as foreign direct investment, where companies have moved their manufacturing bases to the country to capitalise on the high quality workforce and low wages.
The Russian situation has also contributed to money coming in, as investors from neighbouring countries have moved their investments to Poland, in an effort to avoid the sanctions imposed on the Russian economy.
This all sounds pretty good, but there are headwinds too. For a start, the trading ties to Germany, while hugely beneficial, have created a strong reliance on the German economy, and although it has remained strong despite the main European woes, any decline does have a knock-on effect.
The uneven or unbalanced make up of the economy isn’t helpful either. For example, the agriculture sector is at risk as demand for food in Europe is decreasing, as Russia is no longer buying EU supplies in retaliation to sanctions. In addition, the slowdown in China is also affecting worldwide demand, and this will not help the machinery/transport equipment manufacturing sectors, where Poland excels.
This uneven economy is not helped by the notorious legal situation in Poland. Regulations and legal frameworks are very complicated and often act as a barrier to business. They are classified as one of the worst OECD countries for ‘clarity, efficiency and neutrality of legal framework’, which can cause major issues for companies trying to operate there.
Finally, a long-term issue for Poland is the demographics. Since 2004, when they were accepted to the eurozone, large numbers of young adults have migrated to other countries within the EU. This has created a population vacuum, as many of these people are not expected to return and a large swathe of what would be the working population, educated and paid for by the Polish economy, are now contributing economically elsewhere. While the implications of this are unlikely to be felt for many years, it could ultimately cause a skills shortage and unbalanced populous in the decades to follow, hampering the long-term growth of the economy.
As it stands, however, Poland is demonstrating stable and robust growth, capitalising on its areas of strength while the going is good and utilising its geographic, political and demographic positions well.
So how can you, as an investor, take advantage of the opportunities presented? With such a large economy, Poland represents more than 20% of the MSCI Emerging Europe benchmark** and, as a result, appears in many different funds. Investors in this area of the world do, however, need to be cognizant of the fact that Russia represents almost half the index too. This makes investments extremely volatile.
One of the funds with the highest weighting to Poland (18.5%) is Invesco Perpetual Emerging Europe, a long-term equity fund, which has returned 7.29% year to date***, compared with the MSCI Emerging Market Europe benchmark of -5.98%. There is also the Aberdeen Eastern Europe fund, which has 13% invested in Poland, which returned -2.62% in the same period.
* Source: OECD
** MSCI Emerging Market Europe as at 31 August 2015
*** Source: FE Analytics as at 22 September 2015
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time