Eastern Europe and the Polish Surprise

My recent travels took me to Eastern Europe, where I had the opportunity to meet with colleagues and discuss the latest developments in the region. I thought I’d invite Greg Konieczny, who is based in Romania, to share some of his insights. Greg is chief executive officer Romania, and director of specialty strategies at Templeton Emerging Markets Group.

Emerging Europe is a quite broad and diversified region. We think there are a variety of excellent investment opportunities there, but only if companies and country exposures are carefully selected. This has been quite evident this year when you look at the performance of equity markets across the region.

Year-to-date through October 31, the MSCI Emerging Markets Europe Index was up 14.4%, underperforming the broader MSCI Emerging Markets Index return of 32.3%.1 But, differences between local markets were huge.

Poland’s equity market has returned 51.6% year-to-date, while Russian stocks have fallen 4.7% (based on MSCI country indexes).2

Poland was a bit of a surprise given budget-deficit challenges and its populist government’s plans to further nationalize Polish private pension funds, which are the largest equity investors on the local stock exchange.

Russia is the only market this year in the red. We think geopolitical tensions and international sanctions have likely played the major role in souring investors’ appetite for Russian equities.

Poland and Romania in Focus

Polish stocks faced a number of headwinds in the beginning of the year, but market sentiment changed. Listed companies saw strong financial performance, and there have been fewer business-unfriendly messages from the government. There have been also some positive policy changes.

  • Improvements in value-added tax (VAT) collection in the energy market and some other sectors exposed to fraud, including electronics.
  • Allocation of additional funds to support and promote innovation and technology supporting local talent.

There have been some concerns about the rise of nationalism in Poland in particular. Some observers feel the country has been taking steps backward lately. But, growing nationalism has been a challenge for a number of countries in the European Union (EU), including among some developed countries. The Brexit vote in the United Kingdom is just one example.

In Central and Eastern Europe, Hungary under Prime Minister Viktor Organ was really the first country to restrict foreign investment in some strategic sectors. Poland was next to follow under PiS (Law and Justice Party) leadership, and one target was the banking sector where foreign-owned banks dominated.