Eastern European stocks are a bargain

Torun, Poland ©
Poland’s economy should continue to grow rapidly

Poland’s ruling Law and Justice party (PiS) comfortably secured re-election at the weekend. PiS, which combines conservative nationalism with leftist economic policies, took 44% of the vote compared to just 27% for the centrist and business-friendly Civic Coalition.

The economy boomed during PiS’s first term in power, notes Liam Peach for Capital Economics. GDP growth has averaged 4%-5% in recent years and unemployment has plummeted so much that there is a labour shortage. The government was rewarded for ramping up social programmes, particularly its flagship “500+” child benefit policy. This time it has pledged big increases in the minimum wage.

Cheap stocks

Polish stock are the single biggest component of the MSCI EM Eastern Europe ex-Russia index, which also includes Hungary and the Czech Republic. The index has beaten the wider emerging markets benchmark over the past three years, but it has fallen by 8% since the start of the year.

High growth is expected to slow in coming years as the region’s population is ageing and shrinking. Rising authoritarianism in Warsaw and Budapest is another concern, note Leszek Balcerowicz and Aleksander Łaszek for Politico. Private business investment in Poland has taken a hit over the last three years as the ruling party nationalises businesses and threatens the rule of law.

Yet there are also reasons for optimism. GDP per capita of $15,424 in Poland and $23,078 in the Czech Republic remains far below the eurozone average of $40,012. That leaves significant room for “catch-up” growth as the region converges with wealthier neighbours.

That could prolong Poland’s reign as a “European growth champion”, says Eglé Fredriksson for Euronews. “Polish equity valuations are at the lowest level in seven years” and earnings per share growth forecasts are good. With Polish equities trading on a cyclically-adjusted price-to-earnings ratio of 11 and Czech equities on just 9.9, the downside risks appear limited and there is a greater chance of superior long-term returns. The region’s yields are also some of the best in the world, says Frank Holmes for Forbes. The top four emerging markets for dividend yields are Argentina, Russia, the Czech Republic and Turkey.

Yields ranging from 5.8% in the Czech Republic to 7.6% in Romania are attractive for income-seekers. The small size of the region’s markets means that they are often overlooked in favour of bigger Asian growth stories. Yet there is plenty of eastern promise closer to home as well.

One way to play eastern Europe is through the Baring Emerging Europe trust (LSE: BEE). An exchange-traded fund tracking Polish stocks is the MSCI Poland UCITS ETF (LSE: IPOL).