Poland Is Winning Over Investors With Pivot Back to Europe

Investors are delivering a clear verdict on Poland’s elections with a rally that’s defied the global markets selloff.

(Bloomberg) — Investors are delivering a clear verdict on Poland’s elections with a rally that’s defied the global markets selloff.

The country’s assets were at the top of rankings this week on the expectation of a new pro-European administration grabbing power in Warsaw after eight years of populism. The zloty has gained 2.4% against the dollar since Sunday’s vote, beating all 30 of the world’s other major currencies. Warsaw’s WIG20 stock index advanced almost 3%.

Those results stand out at a time when markets are tumbling in unison as US bond yields approach 5% and the war between Israel and Hamas threatens to widen. As a point of contrast, the equity benchmark for emerging markets sank 2.6% in the week, the biggest loss since August.

And there’s evidence that Wall Street is changing its mind on Poland’s investment case. Morgan Stanley strategists said they’re more bullish on Polish stocks, expecting further gains and citing the prospect that pro-EU policy would unlock billions in funding.

“The opposition win is likely to lead to a sustained rethink on the attractiveness of the Poland proposition, which despite strong growth over recent years has suffered,” said Pepijn Bergsen, macro policy analyst at Medley Advisors. “This will take some time to solidify as the new government will only take office in several months’ time and questions remain over how effective it will be.”

The ballot’s outcome was surprisingly unambiguous: a three-party opposition alliance won an unassailable majority in parliament. The outgoing Law & Justice party has upended ties with Brussels and Berlin while removing the checks-and-balances on its rule. 

The next administration, likely led by former European Council President Donald Tusk, faces the difficult task of undoing judicial overhauls which the EU said gave politicians too much sway over the courts. If it manages, Brussels is poised to unlock €35 billion ($37 billion) in EU aid — a market-favorite scenario set to shore up the economy and the budget.

Core Benefits

Poland’s U-turn has broader significance beyond tapping badly needed EU funds, especially on an investor map blotted by tensions between global superpowers and open conflicts in Ukraine and the Middle East. 

The east European country’s $700 billion economy also stands to benefit as its leaders tack back to the European mainstream, with expected improvements in the rule-of-law as well as governance standards seen luring portfolio and greenfield investors.

Closer Poland-Ukraine ties may add as much as 3.8 percentage points per year to Poland’s gross domestic product when post-war reconstruction efforts begin, said Gustavo Medeiros, head of research at Ashmore Group Plc.

Jakub Cery, an analyst at Erste Group Bank AG, put it bluntly: “Poland will become more attractive to investors as an integral part of Europe.” 

Presidential Veto

To be sure, the transition of power could get drawn out over two months, fiscal policies by the incoming coalition may be looser than ideal during a period of spiking borrowing costs, while President Andrzej Duda — a former Law & Justice lawmaker — may veto the administration’s larger reform efforts.

Furthermore, Poland’s central bank, which blindsided investors with a steep rate cut in September, may turn hawkish following the ballot, according to economists at Goldman Sachs Group Inc.

Any of these factors could cut the rally short, which has also seen the narrowing of the extra yield investors demand to hold Poland’s dollar-denominated bonds over Treasuries.

For now, investors seem captivated by Polish markets. The real test will be whether the cabinet can deliver on its promises, said Eldar Vakhitov, an emerging markets sovereign analyst at M&G Investments in London.

“We expect the outperformance to be a gradual and an extended one, in line with the market’s expectations of a positive policy shift starting to materialize,” Vakhitov said.

–With assistance from Piotr Skolimowski.

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