Every once in a while the stock market likes to throw the baby out with the bath water. Stock markets of solid developing economies decline for no other reason than because problematic developed economies drag them down.
In my view, another such buying opportunity is building as the European crisis is far from over. Right now, two-year Greek government bonds (GGBs) yield 11.1%, while 10-year GGBs yield 10.9%. This yield curve inversion — shorter-dated maturities yield more than longer-dated bonds — is an indication of governmental funding stress as the economic situation in Greece deteriorates.
Since Greece has become the face of the euro problem in general — and the PIIGS problem in particular — this is one indication that the situation in Europe is about to get very interesting. And as the expected selloff unfolds, you should take the opportunity to take a closer look at Poland.
Poland Investments – How They Are Different
Poland is different for the rest of Eastern Europe. It is not a natural-resource oriented market like Russia, and it is very different from some smaller more problematic Eastern European countries that have large trade deficits — while there is a trade deficit in Poland, it is not a large one. The country has pursued a policy of economic reforms since 1990 and has outperformed most Eastern Bloc economies in the past two decades.
Leading up to the fall of 2008, Polish GDP had grown about 5% annually mainly due to strengthening private consumption, a climb in corporate investment, and E.U. fund inflows. Those E.U. accession funds have done economic miracles in some of the smaller countries in the region as (relatively) small amounts of money can go a long way in such places.
In fact, Poland actually never entered a recession in 2009 as both fiscal and monetary economic policies were accommodative and the country had never gone down the road of inflating real estate and stock market bubbles. The exchange rate is somewhat free-floating (USD: PLN) — aka a “dirty peg” — and has been under pressure in the past due to problems in PIIGS countries and neighboring Hungary (USD: HUF).
Still, all this turmoil in Europe has given you an opportunity to buy Poland on the cheap. The stock market is capitalized at about $150 billion, while GDP is in the $427 billion range — this is a low stock market capitalization to GDP ratio. Also, there is manageable level of public debt to GDP of 46.5%.
In the U.S. we have the choice of only one listed ETF — the Market Vectors Poland ETF (NYSE: PLND) which gives you access to the most liquid companies on the Polish stock market. Market Vectors has again done a good job to bring you an opportunity to play an exciting emerging market, just like it did in the case of Vietnam and Egypt.
Given the stress that is building in Greece, Spain, and other problematic countries, I think the odds are that you will be able to buy the PLND around $20 within the next month or two. But, this volatility is worth enduring as such sustainable economic growth in a nation with low indebtedness and rising domestic consumption will pay handsomely for long-term investors.
PLND is basically a play on financials (38.5%), energy (14.0%), industrials (8.0%), and consumer staples (9.0%). Banks in the right emerging markets have superior fundamentals than those in the West as they don’t play Wall Street’s derivative games, but rather lend to organically growing economies which are not overly-indebted. In that regard, the PLND ETF is a play on the Polish financials — the largest sector represented — as all the main banks are top holdings in the ETF.
Given the double-edged sword boom in ETFs, there is an emerging markets banks dedicated ETF already: the EGS Dow Jones Emerging Markets Financials (NYSE: EFN). This ETF should be a good performer over the long term, although volumes are still illiquid.
I am concerned that the ETF industry, which was supposed to be the fix for the three-quarters of mutual funds that habitually underperform their benchmarks, has already taken things way too far. In the case of PLND and EFN, there is a need for such unique ETFs. But, the industry is repackaging anything into an ETF just in order to collect the management fees, which due to the endless computerized arbitrage has resulted in record convergence of sector and stock performance in the U.S. stock market. This is another incentive for U.S.-based investors to escape the computerized underperformance of U.S. stocks and invest in emerging markets — and PLND and EFN are two good choices to do so.
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