Poland ETFs: Defying Logic as Economy Slows

Relative to the recent rally in other emerging markets ETFs, the surge in the two funds devoted exclusively to Poland has gone somewhat unnoticed. What is even less discussed is a point that makes the recent upside moves by the iShares MSCI Poland Investable Market Index Fund (NYSE:EPOL) and the Market Vectors Poland ETF (NYSE:PLND) all the more impressive.

That point being slowing economic growth. Poland posted third-quarter GDP growth of just 1.4 percent, its lowest growth rate since 2009 and one that is not what investors typically look for when evaluating emerging markets.

Poland is now at risk of a recession and policymakers there are forecasting a glum end to 2012 and a rough first half of 2013 before the economy brightens in the latter half of the new year, the Wall Street Journal reported.

Still, EPOL and PLND continue to run to the upside. PLND, the Market Vectors Poland play with almost $33 million in assets under management, has surged more than 13 percent in the past month. EPOL, which has nearly $180 million in AUM, has jumped 12.6 percent over the same time.

Noteworthy is the fact that both ETFs are again seen printing new 52-week highs today. Arguably, what is more noteworthy is the fact that both are still a long way from their all time highs. PLND is flirting with $23, but the ETF traded over $31 in April 2011. EPOL is currently trading above $39, but that ETF flirted with $40 in late April 2011.

In fact, EPOL has gained more than 25 percent and PLND has jumped nearly 24 percent since the long-term bull case for Poland was highlighted six months ago. That bull case includes a services driven economy that is not as export-dependent as some outsiders believe and still largely untapped (and bountiful) reserves of shale gas.

Still, there are risks. While Poland was able to skirt a recession during the global financial crisis in 2009, the country does suffer from guilt by proximity. Meaning that even though it is not a member of the Eurozone, developed Europe's debt woes can have an adverse impact on Polish equities. Additionally, some investors have unfavorable outlooks for the Czech Republic and Hungary. Poland's proximity to those countries is not a plus if debt and equity markets there flounder.

Weighing on all three nations is the expectation by some analysts and investors that Emerging Europe could be the weakest developing region in 2013.

There are other points in favor of EPOL and PLND. The latter has a trailing 12-month yield of 3.54 percent while the former's trailing 12-month yield is a robust 4.72 percent. Plus, Poland, at least as measured by these ETFs, is inexpensive relative to the broader emerging markets universe.

PLND had a price-to-earnings ratio of 7.54 and a price-to-book ratio of 1.17 as of November 30, according to Market Vectors data. EPOL's P/E is 12.24 and its price-to-book ratio is 1.69, according to iShares data. That compares to a P/E of 17.31 and a price-to-book ratio of 3.02 for the iShares MSCI Emerging Markets Index Fund (NYSE:EEM).

The valuations are noteworthy because EPOL and PLND traded at substantial discounts to EEM, some country-specific emerging markets funds and broader developed Europe ETFs in June. Six-month returns for EPOL and PLND indicate that investors do find Poland attractive when it trades at a discount.

For more on Poland ETFs, click here.