A strange light over Warsaw


Imagine an economy that grows robust with minimal price pressure and low debts. Meanwhile the stock exchange trades at a super-low price/book ratio of 1.1. Sounds too good to be true, right?

With almost 40 million inhabitants, Poland is Eastern Europe's largest economy, and the country has become a textbook example of development theory. Poland has never experienced a recession since independence, and the country tops the stats over increase in GDP per capita.

A growth rate of just under four percent positively separates Poland from Westerner economies, who struggle with secular stagnation. Unlike Brazil and Russia, Poland does not suffer from epidemic corruption. As opposed to China, the growth is of high quality. It is not credit and bubble-driven.

The Polish stock market has become Eastern Europe's parallel to Wall Street. The average daily turnover is at NOK 1.5 billion, which is lower than the Oslo Stock Exchange. However, there are twice as many listed companies in Poland.

With such a favorable macro backdrop one would think that the Warsaw Stock Exchange has been a winner and is valued steeply. However, the reality is quite different. Listed companies are trading only slightly higher than book value on average.

Something is rotten. Why have Polish equities decoupled from macro trends?

Political shock

The reason lies in politics. Last year, a conservative populist party won the election by appealing to xenophobia, politicians’ disdain and anger against greedy banks.

Everyone assumed the election winner would act responsible as soon as they went from opposition to position, so few capital markets participants took the election campaign statements seriously. That was a grave mistake.

The new government has actually delivered on many of their electoral promises. Banks have been forced to offer all those who were "fooled" to take Swiss franc loan the option to switch back to local currency at a "fair rate."

This will cost the baking sector billions in losses and is the main reason why the forward P/E is only 12, despite a low price/book and favorable economic conditions.

Moreover, a large part of the board of the central bank has been replaced. This shocked the S&P so much, that they downgraded the credit rating of the country.

Finally, the EU has launched an investigation to see if Poland is in breach of the Union's fundamental democratic and economic principles.

The good news is that Poland is still receiving so much EU funding that Brussels will hardly have trouble getting the country back on track. The prevailing low prices on the Warsaw Stock Exchange probably present a long-term buying opportunity.

Raw populism wins

Having reflected on some of the aforementioned, it strikes me that the primary risk in the financial markets might now be political. Currently strong populist winds are blowing in almost all Western democracies.

Warsaw may be an early warning and not an exotic exception.

We can mention that the only thing that all the US presidential candidates agree, is that free trade is bad and that steps have to be taken to halt the loss of job to low cost countries, including possible punitive sanctions against China.

Moreover, Donald Trump plays big on xenophobia, while Bernie Sanders promises to shut down Wall Street if he becomes president. The reason is that "the business model is fraud."

Maybe we have too much faith in the political system?

Focusing on Spetalen

This week we put Axactor into the Dovre portfolio. Axactor is a debt collection company with Spetalen as principal owner.

The company has ambitious growth plans, and if it meets its guidance, the stock is a doubling candidate. This, together with clever management and strong owners makes us positive.

Dovre portfolio:

  • Kongsberg Automotive
  • Marine Harvest
  • Yara
  • Nordic Semiconductor
  • Europris
  • Axactor

In: Axactor

Out: Storebrand