Saxo Bank

What may be the impact of FTSE Russell’s decision to upgrade Poland’s status to developed market?

In September 2017, FTSE Russell announced the upgrade of Poland from emerging to developed market status, which comes into effect on 24 September. Saxo Bank experts comment on how this may impact the local economy, the FX and bond markets.

Saxo Bank’s Head of Macro Analysis, Christopher Dembik, thinks Poland’s upgrade to a developed market is clearly a big step and represents a strong acknowledgment of the progress of the Polish economy and capital markets. “It may bring more attention to the Polish stock market, but it is not certain that it will lead to a major increase of inflow into the country’s stock markets. Poland will only constitute 0.38% of the FTSE Developed All Cap ex-US, which is lower than its 1.6% composition of the FTSE Emerging All Cap Index”, he said.

“It is highly possible that foreign investors will try to find opportunities in the Polish stock market, but I strongly believe it is often better to be a big fish in a small pond than a small fish in a big pond. Poland’s stock market will be in more direct competition with other well-known developed markets, so it might be trickier in the long run. The financial community and politics will need to do their best to attract on the long-term foreign investors”, Dembik continued.

Dembik believes this upgrade will constitute a major development, but the major event for the market will be better linked to expected higher interest rates: “As we have seen over the past years, the Polish stock market has evolved in a range and has not benefited from the strong positive momentum noticed in the US and in some Western European stock markets. I think higher interest rates might be a trigger to better banking performance and since the banking sector represents around 1/3 of the capitalization of the Warsaw Stock Exchange, it could help to revive the stock market and push it higher, above the level and 2600 and hopefully near-by the threshold of 3000 (2011 high)”.

FX perspective

“As this has been a long time in coming, the impact of the actual September 24 date rolling over could be rather minimal”, thinks Saxo Bank’s Head of FX Strategy, John Hardy. “Anyone planning on purchasing large amounts of Polish debt on or after this date might have put on hedges or forward contracts in PLN months ago. More important for the day-to-day movement in the zloty these days is the risk of any worsening relationship within EU and the development in Poland’s credit spreads (yield on foreign currency denominated Polish sovereign debt versus the yields on sovereign debt in Europe or the US) after they bottomed early this year and then rose rather sharply this spring and into the summer. Some looking at CEE countries could see the showdown between the EU and Hungary, for example, as a worrying precedent, and Poland has faced similar concerns from the EU’s side. As well, the EU has threatened a shift in its 2021-2027 budget priorities away from CEE and more toward Southern Europe, which is a longer-term negative at the margin for Poland” added Hardy.

“For now, the tone looks more hopeful and the Polish economy has achieved growth levels that are the envy of most other EU countries, thinks Hardy. “As well, the Italian populist government has managed to keep Italian yields from worsening further for the time being, helping to lower the temperature of general EU existential concerns. PLN could trade a bit stronger still – toward 4.25 in EURPLN or a bit lower – if credit spreads ease further, but we think the longer-term concerns about EU existential questions are not likely to mean a sharply stronger zloty relative to the euro”, he said.

Bond market

“It is undeniable that in the past few years Poland has managed to grow robustly, however it is important to note that although the country shows a solid economic and fiscal performance, it remains closely depended to the economic recovery of the European Union, making the instability in Italy and Brexit the main two risks that Poland is facing at the moment”, said Althea Spinozzi, Fixed Income Specialist at Saxo Bank.

“Polish government bonds have a considerable pick up vs the German bunds, and with FTSE announcement to upgrade the country to developed market status, we can expect Polish government bonds to rise. However, I believe that benefits of these news will be limited as I’ve mentioned above, there are bigger risks that are weighing on the overall European bond market”, she concluded.