Navigating the Polish investment landscape

Our Emerging Markets team recently returned from an insightful trip to Poland, where we explored its dynamic investment landscape. Since emerging from its communist past and establishing itself as a democratic state in 1989, Poland has achieved remarkable progress. It has not only become one of the major economies in the European Union (EU), ranking after Germany, France, Italy, Spain and the Netherlands, but is also one of the region’s fastest growing.

With a population of over 38 million, Poland boasts one of the largest consumer markets in Central and Eastern Europe. The country is known for its highly educated and skilled workforce. Polish universities tend to produce graduates in the fields of science, technology, engineering and mathematics. It’s no wonder Poland has attracted major players in the EV battery and semiconductor industries, such as LG Energy Solution, SK Inc. and Intel, further cementing its reputation as an attractive investment destination. Cities like Warsaw, Krakow and Wroclaw offer a vibrant startup environment, presenting excellent investment opportunities in technology, gaming and entrepreneurship. Notably, Poland is home to nearly 500 gaming companies employing over 14,000 people.

The country has also benefited from the recent settlement of 1.5 million Ukrainians fleeing Russia’s invasion who are expected to make Poland their permanent home, providing a significant boost to the local economy. Ukrainian can be heard on almost every major Polish street.

Poland’s accession to the EU in 2004 played a pivotal role in its development, granting Polish businesses unprecedented access to a vast market and creating abundant opportunities for growth. The EU membership also facilitated access to funds for infrastructure development, research and other strategic projects, contributing to Poland’s progress.

During our visit, we engaged with our holding companies, explored potential ideas and attended a consumer and technology conference. Key takeaways from our meetings include Polish companies rapidly expanding across Europe, intense competition in the grocery sector (especially from discounters), Polish consumers dealing with high inflation and negative wage growth (but that situation has likely bottomed), concerns surrounding the upcoming Fall parliamentary elections and the hope that the resolution of the war in Ukraine will open up vast opportunities for Polish companies.

Although the current level of inflation remains high, it meaningfully declined to 13% in May from 18.4% in February, mainly driven by moderating food and energy prices. Poland’s central bank has kept its key policy rate unchanged at 6.75% since September 2022, with the governor mentioning the possibility of rate cuts later this year under certain conditions. Meanwhile, the Polish labour market remains robust, with a record low unemployment rate of 5.2% as of April 2023.

A historic mass protest in Warsaw on June 4 that saw as many as 500,000 demonstrators gathering was primarily driven by a controversial law proposed by the ruling party, raising concerns about potential misuse against opposition leaders. The demonstrations also highlighted such issues as inflation and women’s rights.

We anticipate that inflation in Poland will likely persist at a high single-digit level through to 2024. The outcome of the parliamentary elections could either maintain the current political status quo or unlock the flow of EU funds to the country. Additionally, there is potential for a gradual decline in the country risk premium as geopolitical factors become less disruptive.

Considering the current situation, Poland’s equity market looks attractively valued. The WIG20 Index, consisting of the 20 largest Polish companies, trades at a forward P/E ratio of 8.3x, below its 10-year average of 10.9x and the broader MSCI Emerging Markets Index of 11.3x. Foreign investors and operators have shown increased interest in both Polish public and private companies, with notable examples including UK Entain’s acquisition of STS Holdings, German Mutares’ acquisition of Arriva Poland and Czech PPF’s acquisition of a 15% stake in InPost (INPST), an e-commerce logistics company with a strong ESG profile.

Taking advantage of what we believe to be a temporary dislocation in Poland-based equities, we initiated positions in InPost and Grupa Kety SA (KTY), a manufacturer of aluminum products and flexible packaging.

InPost specializes in out-of-home parcel delivery services primarily in Poland, as well as France, the UK, Spain, Portugal and Italy. Through a network of approximately 30,000 automated parcel machines (APM) and 27,000 pick-up and drop-off points, InPost offers a cost-efficient alternative with a significantly reduced carbon footprint compared to traditional door-to-door delivery. The company’s logistics infrastructure in Poland, supported by an efficient technology platform, covers first, middle and last-mile capabilities. We are impressed by InPost’s dominant market position in the rapidly growing Polish market, aided by attractive business economics. Its first-mover advantage in Poland provides a solid foundation for international expansion, further amplified by the acquisition of Mondial Relay in 2021, which unlocked substantial opportunities in Western Europe. Notably, InPost is still guided by its visionary founder, who retains a significant ownership stake in the company.

Grupa Kety is the leading Polish producer of aluminum products used in construction, automotive industries and flexible packaging for household products, confectioneries, pharmaceuticals and cosmetics. With a consistent track record of revenue growth and profitability, Grupa Kety holds a strong market-leading position. The company is led by a stable and professional management team with an impressive track record. We believe Grupa Kety is well-positioned to increase its market share within the EU and expand into higher-margin hard alloys.

Despite visible challenges, Poland presents compelling investment opportunities in various sectors. The country’s economic potential, combined with its strategic advantages and ongoing developments, make it an attractive prospect for investors looking to capitalize on its growth trajectory.