Bright Outlook For Poland ETFs?

poland-flagPoland is among the few countries in Europe that managed to dodge the European meltdown thanks mainly to its well-controlled financial system. Now that the headwinds in the Eurozone have subsided, Poland has resurfaced as a wise bet in the emerging Europe space. This is especially true in light of the Polish Central bank’s recent raise in GDP and inflation forecast for the next two years.

Central Bank’s Upbeat Projections

After a reduced outlook of 1.1% offered in July, the Polish Central bank lifted the GDP growth projection for this year to 1.3% while the benchmark interest rate was fixed at 2.5%. The outlook for 2014 was moved up to 2.9% from 2.4% while the same for 2015 went northward to 3.3% from 3%.

The central bank believes that the forecast upgrade came on the back of rising estimates of economic growth abroad, better-than-expected use of EU funds in 2014-2015 and the new financial framework for 2014–2020.

A rise in exports as well as domestic consumption were the main drivers of optimism in Poland. As per Markit, continued recovery in business conditions was noticed in the region as evident from the encouraging HSBC Poland Manufacturing PMI numbers that were above the threshold mark of 50.0 for four successive readings in October.

Export orders also increased in October, reflecting five straight months of growth and the longest run in nearly two and-a-half years. Growing business activity in Germany – one of Poland’s largest export market – also led to the bright outlook.

The country’s other major trading partners are also showing a rebound. Total new domestic and foreign order growth showed the second-fastest step up in two and- a-half years since September (read: Poland: A Better Eastern Europe ETF?).

Inflation for this year is forecasted to inch up to 1% from 0.8%. The projection for next year was elevated to 1.7% from 1.2% and for 2015 it was raised to 1.9% from 1.5%. The authority attributed the increase to shrinkage in negative output gap and rising wages, both which will lead to a pickup in inflation.

Since 2004, the National Bank of Poland has followed an inflation target of 2.5%, plus or minus one percentage points. Though the current projections are far from the target level, the economy is definitely heading toward NBP’s goal.

Is All Well for Poland Ahead?

While this is a good start, some issues remain. The inflation forecast is nowhere near the targeted level of more than 2% and policy makers may not to opt for further rate cuts, thus putting an end to easy monetary policy.

Meanwhile, though the current unemployment rate fell 100 bps since April, it is still quite high at 13.0% (as of September 2013) stunting the nation’s growth.

Market Impact

Given this slow-but-steady scenario, Poland emerges as a preferred location for investment as long as Europe investing is concerned. So for investors willing to buy in on Poland’s ruffled but rebounding economy, we have briefly highlighted two ETFs that track the country and could be interesting options:

iShares MSCI Poland Capped ETF (NYSEARCA:EPOL)

EPOL is simply the most popular Poland ETF on the market, as it has over $256.4 million in AUM, and an average daily volume of 300,000 shares. The product tracks the MSCI MSCI Poland Investable Market Index, charging 61 basis points a year from investors.

With 43 stocks in its basket, this fund from iShares puts as much as 63.08% of its total assets in the top 10 holdings, suggesting high concentration risk. Financials actually make up roughly half of the portfolio, leaving around 13% for both materials and energy followed by 9% for utilities.

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