Back a couple of weeks ago, I pointed out how I believe returns in Canada and the United States will suck over the next decade. I’m combating this by paying off my mortgage instead of investing, mostly to please my wife.
I realize not everybody is in the same shoes as me. Some of you are very happy to carry a mortgage at today’s low interest rates, choosing to pay the minimum to maximize that sweet, sweet leverage. Hell, you’re okay with never paying the thing back, and I’m quite okay with this.
But at the same time, I think it’s silly to invest in most North American equities today. So instead, I’ll let you guys know about some alternatives I find to be pretty compelling.
First up is Poland. Here’s why you should invest in Poland.
What am I supposed to do, not start with my favorite Polish joke?
Two Polish guys decide they’re going to get into business selling watermelons. They buy a hundred melons for a dollar each and then sell them for a dollar each. After the day is over and the two are counting their money, they realize they didn’t make anything. “I know our problem!” exclaims the first guy. “We need to sell more!”
Poland is probably best known for being Nazi Germany’s whipping boy in World War II, achieving its independence for all of 20 minutes before the Soviets took over. After a few decades of communism, the country moved to a capitalist system in the early 1990s.
Poland has joined the EU, but maintains its own currency, the Zloty. Yeah, I don’t know how to pronounce it either. It has carved out a bit of a niche as a low-cost producer of goods, exporting wares to Germany, France, and other richer countries. GDP growth has been pretty good, coming in at above 5% until recently, where it has dipped to between 2% and 3%. It was one of the few countries in Europe to post a positive GDP number in 2009.
The big reason why I’m excited about investing in Poland is its stock market is so damn cheap. The country’s stock market has a cyclically adjusted P/E ratio of just 8.6, meaning it trades at just 8.6 times its ten-year average earnings. The same ratios in North America are three times as high.
Shares of the largest companies on the Warsaw Stock Exchange also trade at an average of just 1.1 times book value. Canada and the United States trade at an average of 1.8 and 2.8 times book value, respectively.
Tangerine is offering new customers a fantastic deal. Become A Client And Earn Triple Interest Of 2.40% For Six Months! Plus, earn up to $50 in bonuses just for signing up. Interest on your savings is a good thing.
Over the last five years, the benchmark Polish stock index (abbreviated WIG) is up a little over 20%. The S&P 500 is up almost 90%. Over the last decade, the WIG is up 11% while the S&P 500 is up almost 70%.
We have a market that has underperformed and is cheap. That’s exactly why you should be interested in investing in Poland.
Interesting individual companies
I’ll just spend a little time on a couple individual companies that look interesting. Feel free to skip this part if you find individual Polish stocks far less delicious than Polish sausages.
- Warsaw Stock Exchange trades at just 12.5 times trailing earnings, and should recover as investors buy more Polish stocks. Has a net cash position and pays a ~7% dividend.
- Poland Energy Group trades at 8.5 times trailing earnings despite having a tough last year. It is borrowing aggressively to expand capacity, yet barely has any debt at all. Much less levered than North American utilities.
If you want to buy individual stocks from Poland, use Interactive Brokers. They’ll let you buy directly on the Warsaw Stock Exchange. Some of the bigger companies trade over the counter in the U.S. too.
Most of the big companies have financial reports in English as well. Not sure about the smaller ones.
The easier way for most people to invest in Poland is through ETFs.
The largest one is the iShares MSCI Poland Capped ETF (NYSE:EPOL). It trades at $17.88 with a market cap of $173 million. It has a dividend yield of 2.5% and average volume is more than 80,000 daily shares. It has a management expense ratio of 0.63%, which is a little high, but not alarmingly so. That’s what you’ll pay to passively invest in a place like Poland.
The ETF has 39 different holdings. The largest five positions, which are the country’s four largest banks and its largest energy company, make up about 42% of the fund.
And in an interesting side note, shares of the ETF trade at a 1.9% discount to their NAV. This doesn’t happen much with ETFs.
The other ETF
The other ETF choice for people wanting to invest in Poland is the Market Vectors Poland ETF (NYSE:PLND). I own the Russian version of this ETF.
It is much smaller than its main competitor, with a market cap of just $13.8 million. Liquidity is also much worse, with this ETF trading an average of just 2,000 shares a day.
As of right now, the management expense ratio on the fund is 0.6%, and is contracted to stay that low until 2017. However, it could easily rise at that point. According to the fund’s fact page, the gross expense ratio is 1.11% and 0.51% is being refunded to investors.
Many of the same banks dominate the top holdings, with a mining company thrown in because hey, why not? The top five holdings consist of about 35% of the fund, and the total number of holdings is 25. The dividend yield is better, coming in at 3.2%.
Of note, there are also emerging markets ETFs that will give one a small exposure to Poland as well as other cheap markets. They might be worth a look as well.