Poland: Biggest Bargain in Europe?

Cheap shares, strong growth prospects; you do the math

Warsaw, Poland. Warsaw, Poland.

So much for off-color ethnic jokes; Poland isn’t key to Europe’s future, it may be Europe’s future.

SmartMoney’s Jack Kough writes Poland's stock market is temptingly cheap. Sure, shares there have plunged 45% over the past year, versus declines of 35% in broader Europe and 3% in the U.S., as the free-floating Zloty has lost ground to both the euro and dollar over the past year. Hough also notes banks like Spain's Santander and Italy's UniCredit do brisk business in Poland, raising fears that a eurozone banking crisis could spread to Poland.

But Poland is in better shape than its stock prices suggest.

“This year, the Polish economy is expected to grow by 2.5%—slower than last year's 4.3%, but still the fastest rate in the 27-member European Union,” Hough writes. “Last year, the country ran a budget deficit equal to 5.1% of gross domestic product, while America's deficit was 9% of GDP. This year, Poland's government expects to reduce its deficit to 3.5% of GDP.”

The falling Zloty has hurt Polish shares in dollar and euro terms, he adds, but it has also kept Poland's economy competitive.

“Poland is to neighboring Germany a source of low-cost manufacturing in much the same way Mexico is the U.S. As for bank contagion, an HSBC study published last fall pointed out that subsidiaries of foreign banks operating in Poland get much of their funding from local deposits, which reduces their risk of a funding crisis stemming from the eurozone.”

One way to measure a country's projected economic health is to look at the rate its government must pay on 10-year bonds, he writes. The rate Poland pays, 5.4%, is now lower than those of Spain and Italy.

“Poland stacks up well on growth potential, too. It gets 5.7 out of 10 on the Goldman Sachs Growth Environment Score index, which uses 18 variables to judge whether conditions are right for sustainable growth. That's higher than any of the fast-growing ‘BRIC’ countries: China and Brazil, both at 5.4; Russia at 4.9; and India at 3.9.”

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