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Why Poland’s soaring stocks still have room to run

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If you’ve been holding Polish stocks this year, you can afford to buy a round of Zywiec beers for your pals. And prepare to celebrate again soon, because the rally in Polish equities doesn’t look likely to end yet. MarketWatch reports.

Valuations remain attractive, and the economic and monetary-policy backdrop is as attractive as Krakow’s Old Town, according to the bulls. Poland’s ruling Law & Justice party isn’t exactly getting rave reviews from the rest of the European Union, but that doesn’t appear to be a huge headwind yet for the market. “Even though Poland is up massively, it still has room to run,” says Dustin Blodgett, a portfolio specialist at Accuvest Global Advisors, which is betting on the country via the iShares MSCI Poland Capped exchange-traded fund EPOL, +0.29% .

That ETF has soared 51% in 2017, while the smaller VanEck Vectors Poland ETF PLND, +0.84% has surged 55%. They are among this year’s 10 top-performing foreign-equity ETFs, according to research firm’s latest data on U.S.-listed, country-specific, nonleveraged funds. Meanwhile, the Warsaw Stock Exchange’s benchmark WIG20 index WIG20, +1.08% is up 29% this year, with the dollar falling 15% against the Polish zloty USDPLN, +0.1453% .

While those advances for Polish stocks are sizable, they haven’t become pricey. Accuvest ranks 34 countries’ equity markets each month by valuations, based on a half-dozen metrics. Poland ranks as Accuvest’s third-cheapest market right now. “The thing that stands out the most is its price-to-cash-earnings,” Blodgett tells Barron’s. Poland’s multiple is about six, well below the average of 11 among the 34 markets. (Cash earnings are earnings plus the amortization of intangibles and depreciation on fixed assets, according to MSCI.)

Poland is second in Accuvest’s ranking for share-price momentum, thanks to the stock rally this year. Overall, the firm, which has $400 million in assets under management, places country bets based on a model with four categories—valuation, momentum, risk, and fundamentals (meaning corporate earnings and economic growth). Poland is rated 11th out of 34 markets in terms of risk; Accuvest uses PRS Group, a Syracuse, N.Y.–based country-risk specialist, to arrive at that assessment.

The one area where Poland struggles is fundamentals, Blodgett says. Poland has long-term earnings growth of 10%, while the average Accuvest’s 34 is 12.5%, he adds.

Still, some Poland bulls like the fundamentals. “Enjoy the good macro,” says Mai Doan, a United Kingdom-based economist covering Central and Eastern Europe for Bank of America Merrill Lynch, in a recent note. “The strong macro backdrop bodes well for Polish assets and supports credit ratings, despite ongoing headline risks from politics,” she writes, referring to the EU threat to impose sanctions because of the populist Law & Justice party’s efforts to control the country’s judiciary.

“The legal crisis since last year and ongoing rows with the EU so far haven’t blocked foreign capital,” she says. She highlights thousands of bank jobs coming to Warsaw over the next three years. JPMorgan Chase JPM, +0.23% , for example, is expected to employ 2,500 back-office operations staff in Warsaw, as financial jobs flow out of London because of Brexit, the U.K.’s coming exit from the EU.

Doan also praises the central bank, which has held its benchmark interest rate at a record low of 1.5% since March 2015. She forecasts a rate rise in 2018’s second half, saying that the National Bank of Poland “appears dynamic enough to avoid falling behind the curve.”

Morgan Stanley strategists also have been beating the drum for Poland, though they’re mostly recommending Polish bonds rather than stocks. “A combination of strong growth, stable inflation, and a not-yet-hawkish central bank creates a Goldilocks scenario for the fixed-income market,” says a team led by Andrew Sheets, Morgan Stanley’s chief cross-asset strategist, in a recent note.

A Barron’s story in November 2014 (“Why Polish Stocks Can’t Win,” Nov. 8, 2014) warned about a ceiling on Polish stocks, despite the country’s impressive economic performance. Soon after, the WIG20 lost ground, with analysts blaming the drop in part on worries about the then-newly elected Law & Justice party’s policy proposals, which ranged from new taxes on banks to heftier entitlement spending.

Now, Polish equities have come roaring back. The WIG20 remains below its 2013-to-2015 peaks, but it could move through those levels and beyond.

Information provider favors the iShares MSCI fund among the two U.S.-listed ETFs tracking Polish stocks. The fund is 45% financials, 21% energy, and 11% consumer cyclicals, with basic materials and utilities accounting for most of the rest. Its two biggest holdings are Powszechna Kasa Oszczednosci Bank Polski PKO, +2.30% and oil refiner Polski Koncern Naftowy PKN, +0.68% .

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