Why investors should pay attention to Polish small- micro- and nanocaps
With around 38m inhabitants, Poland is the largest of the ex-communist countries that since 2004 have joined the European Union. Its economic transformation has been one of the most successful in Central and Eastern Europe (CEE). Since 2004, the yearly GDP growth has averaged 3.9%, while disposable incomes have increased by 4.8% y-o-y on average. The Polish population is very entrepreneurial and well-educated, with >40% of 30-34 year olds having completed higher education. In a recent study by EF Education First, Poles ranked 8th worldwide (out of 60 countries) when it comes to English language skills.
The Warsaw Stock Exchange
The capital market in Poland is considered the most important and best-developed one in the CEE region. Since the beginning of the 90s, it has grown very dynamically, with 803 companies now quoted on the regulated and alternative (NewConnect) market. Foreign investors generate c. 50% of the total trading volume, however, in contrast to risk-averse nations such as Germany, Poles like to invest on the stock market. Polish mutual funds currently have AuM of PLN (Polish złoty) 252.2bn/EUR 56.1bn, while those of private pension funds, which now are no longer allowed to invest in bonds, amount to PLN 140.5bn/EUR 31.2bn. In addition, Poles also have cash & bank deposits totalling >PLN 700bn, which given today’s record-low interest rates they may allocate to riskier assets such as equities.
Many highly-promising smaller companies lack sell-side coverage
Currently, by far the largest share of trading on the Warsaw Stock Exchange takes place in the WIG20 index, which comprises the 20 largest companies (mostly financial institutions and companies from the energy sector). Together with the mWIG40 “midcap” index, this is the market segment where sell-side brokers are most active. In the other segments, coverage is weak or does not exist at all, which is why the share of covered companies on the WSE only equals c. 13% (versus c. 70% worldwide on average).
Innovation on the forefront
However, and since Poland’s 2004 EU accession in particular, many innovative new companies have emerged, which are increasingly focussing on foreign markets. They usually operate in highly-promising sectors such as IT, E-Commerce, biotech and medical technology and have strongly benefitted from generous EU subsidies for research and development. Also, as the venture capital industry in Poland is still relatively undeveloped, these companies tend to list their shares on a stock exchange relatively quickly, offering significant opportunities for investors with a higher risk tolerance.
Due to funds from the new EU budget 2014-20 (EUR 82.5bn in total for Poland, thereof >EUR 10bn for innovative projects; there are also other EU “framework” programs) we expect that many more innovative companies will be founded (and listed) in Poland in the coming years. With our research, we want to help them to gain visibility outside Poland, bring them together with foreign investors and consequently support their future growth through access to new sources of funding and know-how.
About East Value Research
Adrian Kowollik is a Managing Partner of East Value Research, an independent research house that is focused on Emerging Europe. He is a Polish-German national and grew up in both countries. As a private investor and in his professional career, he has been dealing with companies from Eastern Europe for the last 16 years, especially with small-, micro- and nanocap stocks, which in his opinion offer superior return potential. Given today’s globalised markets, Adrian is also convinced of the value that international distribution of research can provide.
SMT S.A. is a Polish technology group, which already generates c. 40% of its revenues on international markets. Its main subsidiaries include iAlbatros (E-Procurement tool for travel and expense management) and SATIS GPS (GPS-/GIS-based tool for monitoring of vehicles and machines).