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The European Economy
You Must Own By Jeff D. Opdyke, Editor of Profit Seeker
Dear Sovereign Investor,
A few years ago, the book The Forgotten Man was a mainstay on The New York Times bestseller list. In it, author Amity Shlaes deconstructs President Franklin Delano Roosevelt's concept of the Forgotten Man, the oft-ignored being at the bottom of the economic pyramid during the chaos of the Great Depression. Today, amidst the recent global recession and the financial turmoil in the euro zone, another overlooked entity exists, this time in Europe. This "Forgotten Country" has flown underneath the radar of the financial press and the investor class for years. Yet for profit-seekers willing to take a closer look, its future is now taking shape, with a number of favorable tailwinds propelling it forward.
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As a group, Polish stocks are unappreciated at the moment because of a unique set of circumstances tied to Poland's standing as part of the European Union, but not yet part of the euro zone currency bloc. The institutional investment community is torn: The emerging-markets crowd sees Poland as a slower-growing economy eventually exposed to the euro, so they want nothing to do with the country. Meanwhile, euro-centric institutional investors want nothing to do with the Polish currency, the zloty, because that then requires they must hedge against currency risk. So, Poland exists as the investment world's version of an unwanted orphan. But all of that will change. And when it does, profits will flow to those who invest now. The catalyst that will emerge is Poland's inclusion in the euro zone in the next few years. When that happens, every institutional investor in the world with a euro focus will flood into Polish stocks. Euro-centric index mutual funds will be forced to add Polish exposure, while pension funds and insurance companies will seek to juice the growth of their euro-focused portfolios since Poland's fast economic growth is a bright light inside the euro zone. And just like that, Poland will go from black sheep to white swan. At this moment, many look at Poland and say it's too early to invest there. That's the wrong mentality. Polish companies are strong. The Polish economy is strong. Stocks are cheap. It's not like you're trying to catch a falling knife. In this case, the knife has already landed in the block of wood, and it stopped vibrating long ago. Today, you can just walk up and grab it by the handle without fear. The most successful investors are those who identify an opportunity and act before others are willing to commit. You're always early, and you sometimes must accept some volatility in share prices. But with these kinds of parties, arriving late is often a far bigger risk than arriving early. By the time you see the trend and act, the smart-money crowd – institutional investors – are selling to you the shares they bought much earlier at far cheaper prices. You're the patsy joining the game when the stakes have already been bid up. Germany Looks to the East for Growth While Poland interests me as an investor because of its euro conversion issue, there's an additional catalyst at play that strengthens Poland's future: Germany and its newfound interest in the east. Germany sees that the future for its industrial, export-driven economy is in Eastern Europe, Russia and Central Asia – the "stan" nations that emerged from the Soviet Union's collapse. Ukraine has an abundance of farm land in desperate need of modern Ag practices. Russia has a rapidly growing consumer class to gobble up German goods, and both Kazakhstan and Uzbekistan have resource wealth in natural gas, oil and other metals and miners that Germany would love to access for its own industry. And Poland is Germany's gateway to the east. The Germans have a close relationship with Poland and a historically frosty relationship with Russia. Poland, because it was once a key buffer state in the Soviet empire, knows how to work well with Russia and the Ukraine, both of which border Poland. The Germans want a straight-shot, high-speed truck and rail service from the German border with Poland, directly into Russia and Ukraine so that Germany can supply both with German products. And Poland is all too willing to play matchmaker because it knows that doing so will keep the Polish economy growing at a faster pace than Europe as a whole for the next two decades, easily.
Banks are the Best Play on Expanding Economies As I routinely talk about, the best play on any economy – particularly a faster-growth, still-developing economy like Poland – is the banking sector. Money flowing through business, consumers and government always floods into the banks. And bank profits, therefore, expand. The Polish bank on which I am particularly bullish is Bank Pekao, Poland's second-largest bank and owner of an exceptionally strong balance sheet. And in an environment where a number of small Polish banks exist that increasingly struggle to compete against big players backed by European owners, Pekao is in prime position to play the role of takeover artist. Bank Pekao's home market is the Warsaw Stock Exchange, where the shares trade under the symbol PEO. And as remote as that might seem, EverTrade here in the States offers access to the Warsaw exchange, meaning Americans can easily trade Polish shares directly. If you don't want to go that route, Pekao shares also trade in the Pink Sheets under the symbol PKSKF. Either way, Bank Pekao is a good position. It will do well as the economy expands … and because it's a blue-chip, easy-to-trade Polish stock, it will be one of the first stocks institutional investors add to their portfolio as Poland moves into the euro zone. What makes Poland so surprising, I think, is that the country is simply off the radar these days. Investors, rightly, have a great deal of interest in Asia, where economic growth is robust. They generally dislike Europe because of the debt crisis there – though Poland actually sailed through that crisis and continued to expand while the rest of Europe shrank. But painting Poland into the broader European picture masks the catalysts for change that exist – inclusion in the euro zone and Germany's eastern dream. Though no one is paying attention, Poland's fortunes are looking very bright, indeed.
Until next time, stay Sovereign …
Jeff D. Opdyke P.S. With long-term U.S. economic prospects bleak, I'm intently focused on taking my subscribers into thriving economies where prosperity and the consumer class are exploding. Accordingly, I have found what I believe is the next great investment boom of our time. To learn more, click here. | 
For his Profit Seeker subscribers, Jeff is always looking for companies in position to benefit from the rise of a growing global middle class.
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