Polish equities seem highly attractive given their exposure to the European growth story and the oil price decline with little risk from China and the commodity slowdown. Poland’s fundamentals look relatively strong with few overbearing structural issues. Trade prospects and strong competitiveness coupled with attractive long term valuations should drive stock price appreciation. Political uncertainty and economic risks have been overstated given rising lending and the ability to ease policy further. International markets, especially emerging markets, have sold off violently in recent months with the MSCI EM Index down almost 20% YTD. The selloff has been widespread, leaving investors the question of where it is most appropriate to find value and what stock markets have been unjustly discounted while also limiting exposure to the uncertain environment in China and commodities. Polish equities seem highly attractive in this context given their exposure to the European growth story and the oil price decline which are still not fully priced in. US investors seeking to invest in Poland can find exposure through the iShares MSCI Poland Capped ETF (NYSEARCA: EPOL ). Unlike a large portion of the emerging markets space, Poland’s fundamentals look relatively strong with few overbearing structural issues. Poland’s growth remains around a 3-handle, largely driven by domestic demand which also provided support during the global financial crisis. Resilient domestic demand helps shelter Poland from external shocks. Growth will likely benefit indirectly from European QE, and with the benchmark rate at 1.5%, the Polish central bank still has some ammunition to ease policy. Poland’s trade situation is likely to improve going forward given strong forward-looking fundamental in Europe and the recent slide of oil prices. According to MIT’s Observatory of Economic Complexity, Poland’s largest export destinations remain Germany, France, and the UK. German domestic demand and consumption are experiencing a cyclical upswing given a tightening labor market, QE (until September 2016), and a rise in European bank lending. In addition, an uptick in spending in the US should increase German production and incomes which could easily transfer to Poland through exports. France also benefits from some of the same cyclical forces as Germany, while the UK continues to be one of the strongest domestic demand stories in all of Europe, with potential rate hikes coming in 2016 given strong GDP growth and increasing wage inflation. Given that Poland’s primary import is crude oil which has gone through a large correction, its trade balance should continue to improve as more income stays in the pockets of exporting businesses and domestic consumers. Lower oil prices not only help bolster production in Poland but are beneficial to the Euro Area as a whole, providing more wealth by which to buy Poland’s exports. In contrast to a number of emerging markets, especially in Eastern Europe, Poland is in a strong position to take advantage of positive trade developments. According to the OECD, Poland’s real effective exchange rate adjusted for unit labor costs has declined significantly over the last few years. Price competitiveness gains are not possible for the European periphery (a strong competitor of exports to Germany) due to being part of a single currency union. Likewise, the rest of Eastern Europe and much of the emerging markets space is just now devaluing to adjust for weaker global demand. Poland’s lack of exposure to the slowdown in China and general commodity prices should also help differentiate the region from other vulnerable emerging markets. (click to enlarge) Source: Bluenomics https://www.bluenomics.com/ Paired with the strong trade prospects for Poland are attractive valuations that could play out over the short and medium term. The Shiller CAPE (valuation metric that has a strong correlation with 5-year and 10-year equity returns) for Polish equities is estimated to be around 10, setting up an attractive entry point for potential investors. This also resides in the context of low interest rates, low inflation, and growing bank lending. EPOL maintains a large exposure to financials whose equity prices directly benefit from increased lending while capital ratios remain high in Poland. EPOL provides an attractive dividend yield of 3.64% and is down 15% YTD. Risks to the outlook for Polish equities include political uncertainty, direct exposure to Russia, and a large external debt stock. Given where valuations are currently and the future trade prospects of Poland, these risks should not derail a strong recovery in Polish equities. Poland’s presidential elections earlier this year saw PiS candidate Andrzej Duda win the general election, representing a change to a more populist mindset by the Polish public. This could have important implications on upcoming parliamentary elections which are significantly more relevant for policy and the economic outlook in Poland. PiS currently leads parliamentary polls by a significant margin, suggesting a change in government and potential leftist policy shifts. According to Reuters, the composition of the Polish central bank could also change as a PiS parliamentary majority appoints less hawkish members. Despite the danger of a more populist government, PiS rhetoric has softened in recent months as the party attempts to appeal to more centrist voters. According to Bloomberg and other news outlets, PiS will likely continue to abide by the European Union’s deficit requirements of 3%. In addition, taxes on banks could be less onerous than originally thought. Given strong adequacy ratios and profitability, lending should not be affected materially especially with European QE in full swing. According to Poland’s central bank, the total capital ratio of banks in Poland is at 14.9% as of the first quarter of this year, having increased by over 6% over the previous year. This is in the context of decreasing impaired loans and stable domestic growth. Lending is also tracking GDP growth at around 3%, which suggests sufficient credit conditions for a stable economy. Some relief for domestic consumers, especially those still servicing Swiss mortgage debt, could also be in store from increased corporate taxes. Less hawkish central bank members potentially appointed by the PiS could also provide for easier monetary policy in the near-term, containing any negative lending developments. Events near the Russia-Ukraine border as well as sanctions against Russia are a continuing negative for Poland, but do not seem to be playing much of a role in depressing equity prices. Poland’s export exposure to Russia seems to be already priced in and, despite being a relatively large exposure, could be offset by positive developments with its other European trading partners. According to the Financial Times , farmers in Poland who can no longer export apples to Russia (one of Poland’s largest agricultural exports) have looked to other markets including the Middle East, Hong Kong, and India. It is difficult to see a near-term resolution to the crisis but there could be relief of sanctions on Russia with an escalation of the Syrian refugee problem. Europe may have to rely on Russian leverage in the region given that Syrian rebels have made little headway in Syria. A resolution to the crisis may involve keeping Bashar al-Assad in power and striking some kind of agreement. A removal of sanctions could lead to a removal of a Russian ban on Polish exports, further improving the trade balance. Perhaps the most serious risk to Polish equities is the large stock of external debt the country must service and the effects of Fed tightening on the ability of Polish households and companies to service that debt. Though Fed tightening may lead to an emerging market liquidity squeeze (anticipation of rate hikes has already created an environment of large capital outflows), Poland seems to be less exposed than other markets. Poland lacks many of the structural issues present in a number of emerging market economies. Domestic growth remains strong and the current account balance is only slightly negative. This is in contrast to a number of Latin American economies that are directly exposed to commodity prices and China. In addition, lending and capital adequacy ratios remain strong, lessening the effects of a liquidity shock. The central bank of Poland has stated that Swiss mortgages should only have a moderate effect on economic activity going forward if the Zloty were to depreciate (January 2015 saw the Swiss Franc appreciate 15-20% but with few negative consequences for Polish households). Meanwhile, central bank data suggests general foreign currency loans have stabilized and continue to fall year over year. Competitiveness is higher than in countries like Turkey, Russia, and Brazil where significant devaluations in exchange rates must take place. Poland is also experiencing no inflation, providing plenty of room to ease policy if downside pressures were to materialize. Not all emerging markets are created equal and Poland certainly stands out as a potential outperformer. Political and economic risks have been overemphasized as serviceability of debt and growth remain healthy. Poland is a unique way to play the European recovery and the oil price decline with attractive growth prospects at discounted valuations.