Poland's Economy Outperformed Into The Third Quarter

Early this past week, the Monetary Policy Committee of the Polish central bank, the National Bank of Poland (NBP), surprised the market with a 50-basis-point reduction in its policy interest rate. Consensus expectations were for a 25-basis-point cut. NBP’s Governor Belka explained that the majority of the MPC wanted a concentrated easing cycle, meaning one of brief duration. The accompanying communiqué focused on the weakness of core inflation and the “absence of demand pressures.” The prospect is for continued loose monetary policy for the medium term as inflation fails to reach the NBP’s target of 2.5%.

The Polish economy’s growth appears to have slowed in the third quarter, following a strong 3.2% pace in the second quarter. The loss of momentum in third quarter, accompanied by a 0.3% fall in the consumer price index in August, clearly concerned the central bank. While the Polish economy has been outperforming, benefitting from a large internal market, Poland cannot escape the slump in the Eurozone, which accounts for over 50% of Poland’s exports. Also, the conflict between Russia and Poland’s neighbor Ukraine, coupled with Russia’s counter to sanctions, has created headwinds that are being felt across the Central and Eastern Europe region. The latest Purchasing Managers Index (PMI) for Poland indicates that the slowdown in the manufacturing sector eased in September and the rate of job creation strengthened. While downside risks have increased, it appears that the slowdown has bottomed out. Fixed investment this year is projected to advance at a strong 8% pace. For the full year 2014 we project the economy will advance by 3%, followed by a 3.3% increase in 2015. These growth rates are far above the 0.8% and 1.4% projected for the Eurozone.

The Polish equity market has attracted limited US investor interest so far, as measured by the total ETF AUM (assets under management), which is under $400 million. The iShares MSCI Poland Capped ETF (NYSE:EPOL), accounts for the majority of these assets. The outperformance of the Polish economy this year has been reflected in EPOL’s doing better than the -10.83% year-to-date performance (as of October 9th) of the broad-based Vanguard FTSE Europe ETF (ARCA:VGK), or the -12.18% decline of the iShares MSCI EMU (Eurozone) ETF (NYSE:EZU). Nevertheless, investors in EPOL have endured a year-to-date decline of -7.38%. The projection for continued relatively strong growth of the Polish economy raises the question of whether now might be a good entry point for EPOL. However, the technical measures we consider suggest it would be wise to wait. We will continue to monitor developments in Poland closely.

BY Bill Witherell