The Game-changing Polish Election: Implications for Investors in Emerging Europe

The Polish elections have far-reaching implications for both the country and the wider region. The resounding call for a more liberal, democratic, and market-friendly government marks a historical shift, and this will undoubtedly have a positive impact on the Polish market as a whole, various market sectors and on EU relations. For investors, this political transformation adds an exciting dimension to the allure of Emerging Europe as an investment destination.

Last Sunday, the Polish people cast their votes sending a clear message that they want a shift in governmental power towards the more liberal, democratic, market-friendly coalition of the center-left opposition led by Civic Platform. Results are still not final, but from experience, in markets like Poland, exit polls are quite a good predicter of the final election results.

So, what does it mean for Poland and the markets? First, we must acknowledge that this is great news and to many market participants, a surprising and market-moving outcome, as late as up to the last days before the election, there was very high uncertainty about which side could win.

The Shift in Power and A Historic Turn for Poland

This significant shift in power comes as a result of several key factors. The opposition's victory can be attributed to the mobilization of the electorate, particularly in large cities, among young voters, and exceptionally strong Polish diaspora. The spectacular voter turnout should be mentioned, with 73% of the Polish electorate casting their vote, the highest ever recorded, even surpassing the first democratic election after the breakup of the Soviet Union. These high turnout numbers have far-reaching political implications and demonstrate that Poland is a vibrant democracy with strong civic values, setting an example for other Central and Eastern European (CEE) countries like Hungary and Slovakia. It shows that a turnaround, from the nationalist right towards liberal democratic values, is possible. Moreover, this election marks a significant historic turn for Poland, not only for the democratic opposition but also for the rule of law, free speech and media, European unity, climate and green transition, as well as for the support of Ukraine.

Improvement in EU Relations

We expect the Polish presence at the EU table to strengthen significantly, leading to improved relations with the European Union. This is expected to accelerate the release of a substantial amount of EU funds, 77% of which are currently frozen. Up to EUR 59 billion in the EU recovery fund grants and loans, and up to EUR 77 billion in the next round of cohesion funds, can become available to Poland as early as 2024. In total, this represents 20% of Poland's GDP, making these funds a vital factor for the development of the country, supporting GDP growth and budgetary finances.

Market Implications

This political shift is favourable for the Polish equity market and currency with the potential reduction of the equity risk premium which has been quite elevated for the last 8 years of the PIS rule. From experience, we could anticipate that for every 1ppt of reduction in risk premia, the market could increase around 10%. Other catalysts could be the aforementioned release of the EU funds (77% of which are currently frozen). Today's stock market reaction confirms this sentiment, with the market up more than 5%, and some banks showing an increase of over 10% in their stock prices, along with a strengthening of the Polish currency.

Sectors to Benefit

There are significant implications for various sectors of Polish market. The election outcome is most positive for banks. A somewhat more hawkish or prudent Central Bank and “higher-for-longer" sentiment on interest rates could benefit Polish banks, as they have among the most asset-sensitive bases in CEE. Additionally, bank lending is expected to benefit from the influx of EU funds and the commencement of large investment programs in infrastructure and energy transition projects as well as nearshoring opportunities. Furthermore, the fact that the largest banks are in fact state-owned implies the potential for improved corporate governance; this includes less politicized and more professional boards. Fundamentally, banks are very attractive investments today and our recent meetings with banks in Poland confirm that they offer low valuations, high capitalisation and the potential for some of the best double-digit dividend yields in the region.

For consumer companies, the election outcome should also be positive, as the overall economic growth of Poland will be supported by these changes. The democratic opposition intends to maintain social programs supporting the lowest income households by further decreasing taxes for them. Moreover, some regulations are expected to be reduced for retail companies, and a strong Polish Zloty (PLN) supports retailer margins.

In the remaining sectors, the impact is positive in the long run. Better corporate governance and efficiency of state enterprises, as well as improved shareholder remuneration and dividend policies in state-owned enterprises (SOEs), are expected.

For the overall development of the stock market, it is important to mention that during their last term in power Civic platform was quite active in the privatisation of state-owned companies. Though there are few companies left to privatise, we see the potential for capital markets with the Civic Platform’s promise to abolish some capital gains, which would boost the participation and activity of retail investors.

Conclusion

All these expected changes are well reflected funds’ portfolios. As investors, we are pleased to see that Poland will again offer an exciting investment market for our Emerging Europe strategies. As the largest market in Emerging Europe, we hope that investors will notice this important tectonic shift.

Furthermore, this political transformation adds to the attractiveness of Emerging Europe as an investment destination. With a democratic turnaround in Poland, a strong economic rebound in Greece, a revival of capital markets in Romania, and monetary policy normalization in Turkey, the region becomes an even more interesting and exciting place to invest. It's a pivotal moment in the region's history, and those who seize the opportunities it presents stand to benefit greatly.