Investor Haven Destroyed a Year After Polish Election

  • Once considered regional haven, Polish bonds now lag peers
  • Warsaw stocks also underperform as zloty becomes more volatile

The stock market is under water. Currency volatility has jumped. And the country’s bonds are lagging behind almost 90 percent of their peers.

One year on from the Law & Justice party’s parliamentary election victory, Poland’s market scorecard isn’t looking good.

It’s a landscape that amounts to an investor vote on a government that has told listed state-controlled companies to prioritize Poland’s national interests before their own, imposed the European Union’s highest taxes on lenders and is locked in a standoff with Brussels over democratic standards. Once considered a haven of stability in emerging markets, Poland has seen investment sentiment erode over the past year as the government implements what it calls “patriotic” policies and shuns the “EU mainstream.”

"Poland is no longer a great story,” said Viktor Szabo, a London-based money manager at Aberdeen Asset Management, which oversees about $10 billion of emerging-market bonds and stocks. “In the short term you will enjoy the benefits of looser fiscal policy and stronger domestic demand, but this is unlikely to be sustainable.”

  • Szabo is betting on the zloty to strengthen against the Hungarian forint
  • He has sold out of Poland’s Eurobonds and has a “flat” position on interest rates

While bonds have recovered some of their losses amid the rush for higher returns in a global debt market facing $10 trillion in negative yields, Poland’s equity market has tumbled 16 percent in the past year. With stocks trading at the cheapest relative to peers in more than a decade, real interest rates among highest in the region, and government measures to rein in the budget deficit, investors may be tempted to look again.

Click here for a story on Poland’s turn toward populism.

The following charts trace the ride investors have faced in Poland’s financial markets since Prime Minister Beata Szydlo’s Law & Justice party won national elections a year ago.

After years of trading at a premium to Hungarian debt, Polish bonds underperformed this year as Fitch Ratings and S&P Global Ratings upgraded Hungary to an investment grade.

S&P’s downgrade of Poland in January, triggered by concern over the independence of courts and the media under Law & Justice, led to the zloty’s biggest sell-off in four years and sent volatility soaring. The currency’s second major headwind came in June with Britain’s surprise vote to leave the EU, which roiled markets worldwide and hit eastern Europe the hardest as investors assessed the impact of Brexit on EU subsidies. Currency swings have since eased after Poland scaled back plans to convert Swiss-franc loans.

While foreign investors cut holdings of Polish debt in the wake of the downgrade and plans by Law & Justice to boost social spending and cut the retirement age, local banks took up the slack. Lenders became the biggest owners of government zloty bonds that were exempt from the new tax on assets, helping debt recover some losses from the S&P hit.

The government raised 203.2 billion zloty ($51 billion) in tax revenue in the first nine months of 2016, a 7.4 percent increase over the period a year earlier, as it streamlined collection of value-added and excise taxes and clamped down on evasion. That’s led to the lowest budget deficit increase relative to the full-year plan in nine years even as spending climbs.

After the president and Law & Justice replaced most of the central bankers, the overhauled Monetary Policy Council headed by the new Governor Adam Glapinski has kept its main rate unchanged at a record-low of 1.5 percent as deflation persists. That stance has eased concern that policy makers would succumb to pressure to revive growth with more loosening. Instead, it left Poland with one of highest real interest rates among regional peers.

Special taxes and concern over a plan to charge banks with losses on foreign-currency mortgages have weighed on stocks, sending the benchmark WIG20 Index down 16 percent in the past year. With valuations now at their lowest relative to shares in developing nations in 11 years, investors are starting to look more closely at Polish companies and that’s fueling a pickup in the deal market.

— With assistance by Srinivasan Sivabalan

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