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Will a Weak GDP Outlook Hurt Poland ETFs?

Zacks Equity Research

Poland is one of the few countries in Europe that has shown an ability to weather the economic crisis in the euro zone. The country’s solid economic performance despite the weakness in many of its neighbors can be attributed to the internal strength of the economy, and its minimal exposure to distressed southern European states (Poland ETF Investing 101).

However, the economy, which survived the four years of economic crisis, is beginning to show new signs of weakness.

Reduced government spending along with waning consumer confidence resulted in slower growth of the economy in 2012. The government, in an attempt to scale down the deficit level to EU's requirement of below 3% of GDP, has made significant cuts in spending.

Further, lower export demand attributable to the deepening crisis in the Euro-zone also dampened the growth of the economy to some extent. Slashed public investment along with stagnation in the housing market is leading to a deep recession in the construction sector.

For 2013, the European Commission appears to be a bit cynical on the outlook of the economy. It anticipates the economy to grow at the rate of 1.2% in 2013 and 2.2% in 2014.

The projected growth rate has been slashed from the prior forecast of 1.8% in 2013 and 2.6% in 2014. This is slowest growth rate expected for the economy in a span of 12 years.

It appears that growth in domestic demand will be undermined by a weak economic outlook for the main trading partners of the country. This is expected to affect Polish exports in 2013 (More Trouble Ahead for Italy and Spain ETFs?).

Rising unemployment levels are also a laggard on domestic demand. The unemployment rate last month climbed to a six-year high of 14.2%.

For 2013, the unemployment rate is expected to be at 10.3%. It is believed that the economy will see some recovery in domestic demand only in the latter part of the year.

Still, Poland remains a robust option when compared to many of its peers in the region. Additionally, its projected growth rate is far in excess of what many other economies are seeing in the area, suggesting that Poland could still be a great option.

This could be especially true if domestic demand continues at a decent pace. If this is able to offset the negatives from the lowered exports and some of the fiscal issues, Poland could come out relatively unscathed (Poland: A Better Eastern Europe ETF?).

Further evidence of the improving economic outlook going forward is the country’s reduction in budget deficit and stabilizing government debt. The upgrade of the debt rating outlook by Fitch from stable to positive bears testimony to the same.

The budget deficit narrowed by about 4.5 percentage points of gross domestic product since 2010 to an estimated 3.4% last year, based on European Union standards, according to Fitch. It expects the gap to shrink to 3.2% this year and 2.7% in 2014.

Slower growth notwithstanding, Poland still appears to be a preferred location for investors in Central-Eastern Europe. The economic strength foreseen in the second half of 2013 could thus boost equities in the nation and make Poland a solid play. 

Investors looking to capture this strength in the Polish economy can invest in ETFs tracking the equities of the economy. Below we have briefly highlighted two of the ETFs that track Poland that an investor may consider.

iShares MSCI Poland Investable Market Index Fund (EPOL)

Investors seeking a broad exposure to the Polish equity market might find EPOL an interesting pick.

The product focuses largely on the large cap segment of the Polish market and holds 43 securities in its basket. The majority of holdings are classified as blend stocks from a style perspective.

The fund is heavily concentrated in its top 10 holdings with nearly 68.76% of the total assets. The top three companies combined to make up for nearly 34.75% share of the portfolio.

From a sector perspective, the product has a certain tilt towards the financial sector making up 42.5% of the ETF (Financial ETFs Set to Rally in Earnings Season). Materials and energy sectors also get double-digit allocation in the fund.

With AUM of $164.3 million, the product charges 60 bps in fees per year from investors. Volume is quite good, trading in more than 3 million shares per day, suggesting a tight bid ask spread. The ETF has generated outstanding returns of over 38.3% in 2012.

However, the year-to-date loss stands at around 7.5% indicating that the economy had a slow start to the year.

Market Vectors Poland ETF (PLND)

The fund holds 30 securities in its basket, with a heavy focus on the top 10 holdings that account for about 59.47% of the assets. The top three companies take away more than 20% of the holdings.

In terms of holdings, financials consists of more than one-third of the holdings followed by double-digit weightings to energy (16.6%), materials (14.6%), and utilities (11.3%). The ETF has total assets of $30.7 million. The fund charges a fee of 60 basis points annually.

PLND has generated a return of 13.64% over a period of one year while the year-to-date loss stands at 5.3% (Best and Worst ETFs to Start the Year).

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