Likely entry into the EU and a background of macro economic improvement are two big positives for in...
Likely entry into the EU and a background of macro economic improvement are two big positives for investors in Poland.
Industrial production advanced 3.2% year on year last October, according to Pawel Szymanski, analyst at Schroder SalomonSmithBarney (SSSB). He says that although the unemployment rate is still around 17.5%, it appears that consumer confidence has turned the corner.
Furthermore, he says very moderate wage growth of 1.8% year on year in November, combined with a strong zloty, is keeping inflation subdued, which is raising expectations of further rate cuts in the months to come. The Polish monetary policy committee cut all interest rates in November, but Szymanski says that the scope of the reduction was surprisingly small, at a cautious 0.25% while market expectations centred on a 0.5% cut.
He adds: 'Despite positive indicators boding well for a revival, we still see room for further monetary easing. However, it is clear that the easing cycle is close to its end. We see interest rates bottoming out at 5.75%, at the lowest in 2003.'
The fall in interest rates, as well as the bullish sentiment counting on the country's economic stabilisation after entering the EU, should support the Polish equity market in the medium term, says Szymanski.
Neil Gregson, portfolio manager at Credit Suisse Asset Management (CSAM), says Poland is an interesting case as it has been the most disappointing emerging market in terms of performance over the last two years.
Gregson says: 'Poland is the largest and most liquid economy in the region, with the greatest breadth of stocks to invest in from an investor's point of view.'
'Inflation has fallen substantially and interest rates can fall further and therefore there's been an improvement in the economy and an improvement in corporate profits.'
However, Gregson says that in a weak economic environment, the profitability of companies has suffered, so valuations are not looking particularly attractive at present.
Gregson adds: 'Poland is an interesting turnaround story but the valuations of companies are not compelling. However we still think, given the size of the economy and the upcoming convergence, there are opportunities to invest in selective banks, the telecoms sector, selected retailers and better managed Polish companies.'
Szymanski says that SSSB is maintaining its positive view on the market, arguing that it should be driven by the improved macro picture, with better corporate earnings expected to follow.
In addition to this, he says the positive outcome of the Copenhagen summit, which prepared for the enlargement of the EU into central Europe, should reinforce investor confidence and as a result he says SSSB would expect fund flows to increase in 2003.
The only hurdle to Poland's EU accession, says Szymanski, is the national referendum on 8 June this year. However, given the current support of 67% and a likely increase over the next few months, he says the referendum should be a formality.
Polish macro trends to improve.
Scope for further rate cuts.
Fund flows to increase in 2003.
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