Investing in cheap stocks is like going bargain hunting when you are looking to buy an expensive thing, wait for a sale, and look around trying to find the best price across multiple websites or stores. Sometimes, you can get fortunate and come across an even better version of what you are looking for at the same or cheaper price.
Investing for a global value investor is the same. You have to look around across all the countries and compare where you can find good companies the cheapest.
“Many shall be restored that now are fallen, and many shall fall that are in honor.”
~ Horace -Ars Poetica
Over the last few months, my search for a sale has brought me to Poland. The polish stock market is often overlooked compared to the rest of Europe, with 810 listed companies with a combined market cap of PLN 1.03 trillion (EUR 232 billion).
The market has suffered a decline of 32.58% over the past year, which makes it the 3rd worst 1 year performer in the world(1st being Russia and 2nd being Pakistan).
Such a decline has occurred mainly because of two reasons.
Inflation The Polish central bank has had to increase interest rates almost seven folds from an all-time low of 1.195% in January 2021 to 8.144% in June 2022, which has significantly impacted security prices in the country.
Russian Ukraine war A more comprehensive invasion of Ukraine by Russia could have a significant impact on the activities of the WSE, as Poland is a direct neighbor of this country. The presence of Russian troops on Poland’s eastern border increases investors’ uncertainty. The greater the uncertainty of investors, the greater the propensity to exit stock market investments - especially with global investors. Moreover, individual investors may have a preference for assets perceived as less risky, which may result in both selecting less risky assets within the WSE market, but also wholly exiting the market. Due to the open aggression toward Ukraine, investors are highly likely to sell off their shares in companies listed on the WSE.
The 32% decline over the past year has left a lot of securities deeply undervalued, and any investor with a 3-5 year investment horizon investing in Polish securities should earn a handsome return, in my opinion.
The yield on the 10-year bond is already down from the high of 8.144% to 6.366% and is expected to decline further in the coming months as inflation sinks down to targeted levels with the easing of supply chain issues.
Poland has a robust economy that weathered the European Sovereign Debt Crisis and continues to post strong growth rates. According to economist consensus estimates, the country’s GDP growth is expected to continue at a slower pace.
The World Bank states that the Polish economy is well-diversified and, compared to other European economies, was among the least affected by the COVID-19 pandemic. However, the economy did contract during the pandemic—the first since 1991.2
Poland’s regulators have been working to liberalize the country’s economy and reform many public sectors. The labor market has tightened in recent years, the median income is rising, and the poverty level is decreasing.
International investors in the Eurozone must contend with the common currency’s influence over equity and bond performance. However, Poland’s independent currency has helped it weather crises and succeed.
Here we confront the main irony: one of the most obvious and consistent variables that can be harnessed into a workable investment strategy is the continued overreaction of people to companies they consider to have excellent or mundane prospects.