Poland: A Forgotten Gem?

The new PLND ETF gives investors exposure to the 8^th-largest economy in
Europe, and one that’s growing faster than you might think.

 

Van Eck’s rapid growth in the ETF space continued last week with the launch of the first Polish exchange-traded fund. Market Vectors Poland ETF (NYSEArca: PLND) debuted at a contentious time for the Polish market: Less than a week into trading, Warsaw’s indexes dropped by more than 5 percent in value over a two-day period.

The sell-off in
Poland has made it a little difficult for the fund to attract substantial buying right away; PLND’s daily volume is still around just $300,000, and it has just $2.4 million in assets. Still, over the long term, this temporary weakness may present a unique buying opportunity for emerging market-focused investors who like to see a bit of action in their portfolios.

A Nation Of Investors

Like most emerging markets, the Polish economy is a pretty volatile place. In 2007, GDP growth hit a decade high of 6.8 percent; after the global economy spiraled downward, that number has been reduced to just 1 percent this year. Still, GDP growth is set to return to up to 2.5 percent for 2010.

Local exchanges have seen similarly zany performances. After hitting a high of 3,917.87 in October 2007, the WIG20 Index—an index composed of 20 of the most liquid stocks that trade on the Warsaw Stock Exchange—plunged more than two-thirds in value by the end of last year. This year, the WIG20 has staged a remarkable 70 percent recovery.

Poland is considered to be
Eastern Europe’s fastest-growing frontier market, and by many, its most attractive too. Partly, that’s because of the country’s tight domestic fiscal policy focus.

In
Poland, all citizens are required to make contributions of 3.5 percent of their annual salary to a range of 16 different private pension fund providers. Those pension funds can invest no more than 5 percent of their assets under management outside of
Poland. Of the 95 percent of AUM than remains in domestic assets, 40 percent of funds are invested in common stocks, while around 6 percent is invested in corporate debt, with the remainder funneled into government bonds.

“As long as people work and contribute to this system, then there is a steady inflow of assets and cash to support the value in equities,” Maciej Baranski, an analyst at Warsaw-based broker Bank Zachodni Wbk told IndexUniverse.com in an interview. While unemployment hit more than 10 percent this year, there are signs now that it is on the mend—albeit slowly.

What Lies Ahead

PLND is not for the faint-hearted. With a 40 percent sector focus on financial stocks, any sudden economic jitters are likely to lead to the fund dropping more than for most emerging market ETFs, which are generally better-diversified. Still, it is refreshing to see an Eastern European ETF without too much sector focus in energy (just 13 percent). In addition, industrials and materials sectors, which have done well with the relatively strong euro, comprise nearly 19 percent of the fund.

 

SECTOR FOCUSES as of Oct. 31, 2009
Sector	% Holdings
Financials	40.2
Energy	13.6
Industrials	11.0
Consumer Staples	8.6
Materials	7.8
Telecommunication Services	6.8
Consumer Discretionary	6.7
Information Technology	4.1
Health Care	1.2

Source: Van Eck

 

With such a heavy emphasis on banks, it is worth bearing in mind that, although performance has been strong this year, price-to-book values are far higher for the sector compared with other parts of the frontier landscape.