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Poland is Doing the Right Things

Poland, the fifth-largest country in Europe, is not one of the first places most investors look for opportunities.

But maybe it should be. I returned full of enthusiasm a few weeks ago from my first trip to Poland in 40 years. Poland’s stock market is small — a market capitalization of about $30 billion, roughly the size of Target (TGT) or eBay (EBAY) — but it’s expanding. And prices have been rising lately. Poland’s WIG 20, an index of the country’s 20 largest public companies, is up about 20 percent this year.

Poland’s stocks aren’t easy to buy, as you’ll see. In fact, Poland’s main value to investors is not so much as a source of great stocks; it’s as a reminder of how the financial world is changing. Poland is part of a group of what I call “aspiring” nations — countries such as Ireland, Portugal, and Russia, which are retooling their economies, sometimes with sloppiness and confusion but always with a sincere desire for dynamic growth. By contrast, “complacent” countries, including France, Belgium, and Japan, seem to have reached a level of wealth that has brought stability and contentment, which in turn appears to have dampened the ardor for growth.

Poland truly wants to get on — and that’s the first step in actually doing it.

The country is aspiring to outrace history. The last time I was in Poland, I was a callow teenager, and Poland, then ruled by Moscow, was a nation suffering from a tragically familiar condition. Poland, caught between two great powers with a penchant for aggression, had been rolled over, conquered, and plundered. The last king of Poland was the handsome but feckless Stanislas August Poniatowski, who was placed on the throne by his lover, Catherine the Great, and managed to lose the entire country through partition as it was divided up among Russia, Prussia, and Austria toward the end of the 18th century.

Six million Poles died in World War II, and when the war ended, the Iron Curtain was wrung down and Poland disappeared behind it for almost a half-century. In 1980, the revolt in the Gdansk shipyards by Solidarity began the struggle that, a decade later, brought down communism in the Soviet Union and Eastern Europe.

What’s happened since? A lot and not enough. Poland made the transition from communism to capitalism pretty quickly, with its economy growing at an average of more than 5 percent annually throughout the 1990s. But Poland remained tied, through economics, not conquest, to Germany and Russia, and while the Polish economy grew, it suffered serious setbacks with Russia’s debt collapse in the late 1990s and Germany’s economic stagnation of the past three years.

Gross domestic product rose just 1.3 percent last year, but the economists at Bear Stearns in New York figure growth of 3.5 percent in 2003 and 4 percent in 2004.

Today, Poland is doing all the right things. Even under a government of former communists, it is cutting taxes. Small businesses, literally millions of them, are sprouting. General Motors Corp. and other major companies are opening factories. Poland is joining the European Union — a move that will lower trade barriers and help expand the country’s markets beyond Germany and Russia. And, under Leczek Balcerowicz, the tough and talented economist who heads Poland’s central bank, the zloty (yes, the zloty!) has become one of the world’s strongest currencies, and inflation has been tame.

But Poland, like Portugal, has a long way to go. Its GDP per capita, for example, is just $5,000 — compared with about $35,000 for the United States and $22,000 for France. Nearly a quarter of its people work on farms, and the infrastructure — highways, railroads, waterworks — is still relatively backward. But that’s the point. Poland is like an undervalued stock, ready to move up. But it’s a risky stock. The payoff could be substantial, but the road will be rocky.

Polish stocks trade on the Warsaw Stock Exchange, which was founded in 1817, disappeared with wars and communism, and was resurrected in 1991 (here’s an excellent website, in English). Among the leading companies are Orbis, which runs 56 hotels in 29 cities around the country; Netia, a telecom company that has laid its own fiber-optic network among major cities and now has about 350,000 customers; Grupa Kapitalowa Kety, aluminum processing; Agora, which owns the country’s largest daily newspaper, plus 16 magazines and an outdoor-advertising business; Softbank, which provides information technology to financial firms and government agencies; Polski Koncern Naftowy Orlen, Poland’s largest fuel producer; and Polska Grupa Farmaceutyczna, a distributor of pharmaceuticals.

Unfortunately, investing in these companies individually requires a stockbroker with access to the Warsaw, or in some cases the London, Stock Exchange. There are no exclusively Polish mutual funds. There are, however, a few funds that own a large proportion of Polish stocks in their portfolios. One of the best choices is Central European Equity, a closed-end fund that trades like an individual stock under the symbol CEE on the New York Stock Exchange. It was born along with the modern Poland in 1990, and the ride has been surprisingly smooth.

The fund returned 25 percent last year after modest losses in 2000 and 2001. It’s up by nearly one-third since March and has returned, overall, about 60 percent since the start of 1994. That’s not spectacular, but the theory with Poland is that the best is yet to come. At last report, on May 31, Poland accounted for 40 percent of the fund’s assets, followed by Hungary (26 percent), Russia (17 percent), and the Czech Republic (14 percent). Three of the top four holdings — Telekomunikacja Polska, a telecom company; Bank Pekao; and PKN Orlen — were Polish.

A conventional open-end mutual fund with a far better record but a smaller share of Polish stocks is U.S. Global Investors Eastern Europe (EUROX), which rates five stars from Morningstar. For the three years ending on Wednesday, the fund has produced average annual returns of 15 percent — an indication of how the shares of aspiring European countries can provide good balance to the U.S. market through low correlation — when the U.S. market is down, these stocks are often up, and vice versa.

Russia accounts for 48 percent of the assets; Hungary, 17 percent; Poland, 15 percent; and the Czech Republic, 9 percent. The only Polish stock among the top 10 holdings is Netia. The fund also owns three Polish banks (which always provide a good way to partake in the fortunes of a developing nation): Bank Polska Kasa Opieki, Bank Przemyslowo-Handlowy, and Bank Zachodni.

Among Russian stocks, the U.S. Global fund owns a large chunk of Vimpel-Communications, a cell-phone company whose shares trade on the New York Stock Exchange as American depositary receipts under the symbol VIP, and Yukos Oil (YUKOY), an ADR on the Nasdaq.

An intriguing fund, launched in 2000, combines Eastern Europe with the Middle East, both hotbeds of aspiration. It’s called T. Rowe Price Emerging Europe and Mediterranean. It is, as Morningstar notes, for “adventurous investors,” and its appeals include low correlation to U.S. markets and high growth rates in the region. The fund is up 20 percent this year, after a small gain in 2002 and a small loss in 2001, its first full year. The portfolio includes stocks from Russia, Israel, Estonia, Poland (Telekomunikacja Polska and Agora), the Czech Republic, Egypt, Hungary, and Turkey.

You’re wondering which Egyptian stocks? Orascom Construction Industries and Commercial International Bank.

I’m not sure Egypt qualifies as an aspiring nation. I hope so. Poland certainly does.