Poland’s September election surprise attracted much less attention than the election in neighbouring Germany. Yet the result, which swept the heirs to the former Communist Party out of power, will mean tax cuts and a sharper focus on economic growth, and opens the door for investors to benefit.
I’ll explain below the moves you should be considering. But for those who missed the election – and it wasn’t well covered by the mainstream press here – I’ll start off by filling you in with the necessary details.
The election result saw the Law & Justice party surprisingly come ahead of Citizen’s Platform, meaning it will be the dominant partner in a new centre-right coalition. The ruling Democratic Left Alliance, heirs to the former Communist Party, trailed in a dismal fourth. The chief difference between the two leading parties is over the timing of the adoption of the euro.
Citizen’s Platform wanted to set a firm target by the end of the decade, while Law & Justice, which also wants to adopt the single European currency, argues that fostering domestic economic growth is more important than meeting the euro’s debt and deficit conditions.
In fact, the similarities between the parties are more important than the differences. Both are committed to speeding up economic growth and cutting unemployment. They agree on the need to cut company and personal taxes, which should encourage businesses and individuals to borrow more.
When Polish consumers get their hands on credit cards, growth will fly
About half of Poles have no bank account, loan or credit card. The idea of an electoral surprise in a country like Poland that still results in a business-friendly policy mix demonstrates how far the country has progressed towards becoming a stable, mature democracy. Poland is the largest of the economies that joined the European Union in 2004. As such, faster growth there would be an additional spur for the whole eastern European region. Growth in Poland, Hungary and Slovakia will accelerate in 2006, according to the International Monetary Fund. Slovakia’s GDP will increase 5.4%, compared with 5% in 2005.
Poland, where the central bank has cut interest rates five times this year, will have growth of 4% versus 3% in 2005. Its central bank has indicated it may cut rates further to help consumer confidence. Hungary will post growth of 3.6%, from 3.4%. Only in the Czech Republic will there be a slight slowing in growth, to 3.9% in 2006 from 4.1% in 2005.
Tesco will benefit from retail growth in Poland
Of the various exotic emerging markets which are touted, those in eastern Europe are closer than anywhere else to achieving integration with developed Western economies. One way for investors to profit from eastern Europe’s advance is to buy shares in Tesco, present in Poland since 1995.
Last week, Tesco took over Carrefour’s eastern European superstore chain, in exchange for its Taiwan hypermarkets plus 57m in cash. The deal allowed both companies to pull out of markets where they had a subscale presence and concentrate on their foreign expansions. Tesco, which has more hypermarkets than any other retailer in Hungary, Poland and Slovakia, obtained 15 superstores in the Czech Republic and Slovakia as part of the agreement. That means it is now the second-largest retailer in the Czech Republic, from fourth previously. The company has also said that it is considering expansion into Russia.
Earlier in September, Tesco said its international like-forlike sales grew by 4.4% in the first half, driven by ‘significantly stronger growth’ in eastern Europe, with ‘particularly pleasing’ performances in Poland and Slovakia. The low level of incomes in Poland gives some indication of the scope for growth that exists for retailers – Poles earn about a fifth of the average in the European Union.
Massive potential for the banking and housing sectors…
Banking is another area where eastern Europe is still at a very early stage of development, meaning excellent growth prospects. According to Merrill Lynch, mortgages as a percentage of GDP stand at just 10% in Hungary, and 5% in Poland and the Czech Republic. That compares with 50% in Portugal and 42% in Spain. The average Pole has just 200 of mortgage debt. That compares with 2,400 per head in Greece, while the Portuguese have 30 times the amount of mortgage debt of the Poles.
Blue Planet European Financial Investment Trust, which invests in European banks, offers diversified exposure that would be difficult and expensive for most investors to achieve themselves. Among the fund’s top 10 holdings are OTP Bank of Hungary, the largest lender in eastern Europe, PKO Bank Polski of Poland and Russia’s Sberbank. Also in the top 10 are Bank Przemyslowo-Handlowy of Poland and France’s Societe Generale, which has expanded into the Czech Republic and Romania.
Joined at the hip to mortgage growth in eastern Europe is the poor quality of much of the region’s housing stock. Many homes were built with intended lifespans of 50 years in the decade following the Second World War. An average of 3.1 people per household gives Poland one of the densest occupation rates anywhere in Europe. The scale of future demand for new homes and the improvement of existing dwellings is clear. Increased purchases of basic products from retailers and banks, and a desire to improve your own home, are among the most predictable consequences of economic growth in emerging markets.
Derek Moorhouse is a freelance financial writer, and has been a regular member of The Fleet Street Letter investment team since 2002.
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