Poland Lures Putnam as Zloty Leads Emerging Markets

By Piotr Skolimowski and Pawel Kozlowski

July 30 (Bloomberg) -- Five months after investors fled Poland on concern eastern Europe was headed for a banking crisis, money is flooding back to one of the few countries to escape the global recession.

Morgan Stanley, Putnam Investments and Brown Brothers Harriman & Co. forecast more gains in the zloty following a 6 percent rally that made it July’s best performer against the euro among 26 emerging-market currencies. Citigroup Inc. raised its outlook on Polish shares to “overweight” this week as the WIG20 Index extended its longest monthly rally since 2006. Bonds are soaring after investors bought $3.5 billion of government notes, more than twice the amount planned.

The European Union’s largest eastern economy is back in favor after Prime Minister Donald Tusk pledged to support the zloty, the International Monetary Fund provided a $20.6 billion flexible credit line and the country posted the only positive quarterly growth rate among the EU’s 10 eastern members.

“In Poland we’ve seen a dramatic change from poor fundamentals last year to pretty good fundamentals now,” said Paresh Upadhyaya, who helps manage $21 billion in currencies as senior vice president at Putnam in Boston. Putnam plans to sell the euro and buy the zloty because the currency is “fundamentally undervalued,” Upadhyaya said.

Best Worldwide

Foreign investors poured 2.6 billion euros ($3.7 billion) into Polish bonds and stocks in April and May, the most recent months for which central bank data are available, after seven months of outflows. Poland’s 10-year dollar bonds have surged since the sale this month, reducing the yield to 220 basis points over similar-maturity U.S. Treasuries from 290 basis points, or 2.9 percentage points.

The WIG20 share index rose 9.6 percent in July, headed for its fifth month of gains. The zloty’s 6.1 percent appreciation against the dollar was the second-biggest worldwide after the Canadian dollar. PKO Bank Polski SA and Bank Pekao SA, the country’s largest lenders, jumped more than 18 percent. Coal mine Lubelski Wegiel Bogdanka SA climbed 42 percent since raising the equivalent of $178 million in eastern Europe’s largest initial public offering in June.

Even after the rally, Polish shares are cheaper than the emerging-market average with a price-to-estimated-earnings ratio of 14.4 for the WIG20 compared with 15.3 for the MSCI Emerging Markets Index, according to data compiled by Bloomberg. A strengthening zloty and a 30 percent jump in per-share earnings next year, more than the average in emerging markets, will boost stock market returns, Citigroup strategist Andrew Howell said.

Buy Zloty

“Poland was really unfairly punished,” said Win Thin, a senior currency strategist at Brown Brothers Harriman in New York. “Poland is less exposed to the global crisis in the sense that it’s got a pretty large domestic market, so it’s not quite as export-dependent as the Czech Republic, Hungary and some of the other Europeans.”

Brown Brothers Harriman recommends buying the zloty for gains of 7.4 percent by yearend to 69.3 against Hungary’s forint and of 3.4 percent to 6.33 per Czech koruna. ING Groep NV says the currency will rise 4.5 percent to 4 per euro by Dec. 31. Pasquale Diana, a London-based economist at Morgan Stanley, predicts the zloty will surpass 4 per euro in the first half of 2010 “provided risk appetite remains constructive.” Citigroup expects the zloty to strengthen to 4.1 against the European currency by the end of the first quarter.

The zloty gained 0.4 percent to 4.1802 per euro, and the WIG20 index advanced 0.7 percent to 2,054.21 as of 10:50 a.m. in Warsaw.

Brink of Crisis

Poland’s currency plunged 27 percent against the euro in the six months to March 31, the biggest decline among emerging markets monitored by Bloomberg, as a 16 percent slump in fourth- quarter exports sparked concern companies would fail. The weakening exchange rate threatened to trigger defaults in a contry where 71 percent of mortgages are denominated in foreign currencies, according to the most recent data from the financial regulator at the end of March.

Moody’s Investors Service warned Feb. 17 that eastern Europe’s downturn may become more severe because of a dependence on western banks, which faced potential downgrades on bad loans. It listed Hungary, Romania and the Baltics among the most vulnerable.

“Eastern Europe was on the brink of a severe macroeconomic crisis,” Citigroup’s Howell wrote in a July 24 report. “There is an element of ‘guilt by association’ that has probably led Poland to be punished more than its fundamentals deserve,” Howell said.

‘Blinded to Risks’

Poland’s parliament agreed this month to widen the budget deficit by 48 percent to 27.2 billion zloty. The gap may reach 6.6 percent of gross domestic product this year and 7.3 percent in 2010, more than double the EU’s 3 percent limit, according to the European Commission’s forecast.

While the Treasury has doubled its target for state-asset sales next year to 25 billion zloty ($8.4 billion) to finance the budget, the government is struggling to garner support. Tusk said last week Poland won’t rush to sell its stake in KGHM Polska Miedz SA, the copper producer with the biggest European mine output, after opposition from unions and the Peasants Party, a coalition member. Tusk, who may run in presidential elections in April, also said the government won’t raise taxes next year.

“People bought into a story of Poland being insulated to the global slowdown, which has completely blinded them to risks stemming from fiscal deterioration,” said Neil Shearing, an emerging Europe economist at Capital Economics Ltd. in London. “This may come to haunt the markets next year as the government will have to consider more radical fiscal tightening, making the recovery sluggish.”

Economy Expanding

The zloty’s depreciation, which ended in February as the Finance Ministry began selling euros from EU grants, has helped boost Poland’s competitiveness and limited damage from the world recession, said ING strategist Daniel Salter in Moscow.

Poland had a current-account surplus for a fourth month in May. Consumer goods prices have fallen faster than in any other country, based on a 30 percent drop in McDonald’s Corp. hamburgers charted by the Economist magazine’s Big Mac Index.

The government predicts 0.2 percent growth this year as lower taxes lift consumer spending, which makes up 61 percent of the economy, compared with 52 percent in the Czech Republic and Hungary, according to data from Citigroup and BNP Paribas SA. The median estimate of 14 economists surveyed by Bloomberg is 0.5 percent growth. Hungary expects a contraction of 6.7 percent and the Czech state predicts a 4.3 percent decline.

The IMF credit in May is helping to shield Poland from more financial market turmoil.

“Poland is probably the only country in Europe that could actually post growth this year and that’s something people find attractive,” said Morgan Stanley’s Diana.

To contact the reporter on this story: Piotr Skolimowski in Warsaw at pskolimowski@bloomberg.netPawel Kozlowski in Warsaw at pkozlowski@bloomberg.net