Poland: Coming of age

Warsaw, Poland’s capital, is always an important research investment stop for us. After Russia, Poland has some of the largest and most important companies in Eastern Europe. Equity investing is not new to the city, since the first stock exchange was established in 1817 and continued trading until World War II.

The exchange was re-established in 1991 following the end of the post-war communist control of the country and the return to a free-market economy. As with other markets in the region, the Warsaw stock market has had its share of volatility, but has recovered well and is now up over 100 per cent in US-dollar terms from its recent low point in February 2009.

There are a number of fascinating and beautifully restored historic places in and around Warsaw. This is quite amazing considering Warsaw was almost completely destroyed by the incessant bombing during World War II. You realise the amount of work and money that went into those restorations when you see some of the ‘before and after’ pictures.

Culture is everywhere in the city. During the summer, there are indoor and outdoor concerts. Frederic Chopin’s music, among my favourites, is most prevalent during these concerts. He helped develop a Polish national music style with his many piano preludes, mazurkas, polonaises and waltzes during his very short 39-year life, which ended in 1849.

We attended a free concert by a famous American pianist performing in one of Warsaw’s beautiful parks, with the audience sitting and lying on the lawn overlooking a stage situated above a small lake. On a street cleared of all traffic in the old part of the city, there were three pianists from different parts of the world, including one renowned Japanese pianist, playing Chopin on small stages spaced along the street.

We visited the exquisite Lazienki Palace, completed in 1793, called the ‘Palace on the Water’, commissioned by the last king of Poland, King Stanislaw August Poniatowski. In his youth, he was a lover of the princess who was to become Empress Catherine the Great. He only enjoyed the palace for a few years before he tragically had to abdicate in 1795 and leave for St. Petersburg while Russia, Prussia and the other European nations carved up Poland.

When withdrawing from Warsaw the Nazis set fire to it, but now it’s beautifully restored. It includes an elegant and richly decorated, intimate ballroom with enough room to seat no more than 50 people with a stage for an orchestra. We had the pleasure to hear a Chopin concert where he actually played, so we could imagine ourselves transported back in history.

Although you might not think of Poland as being a home of haute cuisine, Warsaw has some wonderful restaurants. The Ale Gloria is a striking restaurant owned by Magda Gessler, a creative woman who has recovered a part of Polish history by

decorating the restaurant in folk style, such as colourful paintings and strawberry motifs on the walls, embroidered tablecloths and napkins on the tables, all

set against a sparkling white background. The restaurant is in the basement of a building and, as you go down the staircase, you encounter stained-wood flooring and ceilings with gingerbread-type carvings before sitting down to delicious Polish cuisine.

We visited a number of companies while in Warsaw. The most important development is the move of Polish companies to diversifying into neighbouring countries, and even into the US. This internationalisation is opening up new opportunities for many companies, with an alcoholic beverage distributor expanding into Russia, the US and other countries, a helicopter producer opening a venture in China, and a cinema operator expanding into other Eastern European countries. In addition, banks from Europe and other parts of the world are operating actively in the country.

At an alcoholic beverage distribution company, the ambitious American CEO told us that he expected growth to come from the Russian vodka market, where he expects to duplicate the 30 per cent market share they now have in Poland.

Currently in Russia, the firm is the vodka market leader with a 20 per cent share.

Of course, that’s of the legal market. Consumption of illegally produced vodka is estimated to make up 40 per cent of the total vodka consumption in Russia. But vodka consumption in Russia is expected to decline, even though it still has the world’s highest per capita vodka consumption, so the company is looking to other growth sources.

One trend is the move to premium and mainstream vodka brands at the expense of economy brands. The company is doing well in other items. It has a 50 per cent market share of the Russian cognac market and 70 per cent of the champagne market. Although there are increased sales of wine, beer consumption has already peaked out at 95 litres per capita. The firm is not restricting its operations to Poland and Russia, but is also active in developed markets. Sale of the firm’s vodkas is growing in the UK, France and the US.

Another company we visited runs various food franchises, with a Kentucky Fried Chicken (KFC) franchise in Poland and a number of Eastern European countries, a Burger King franchise in Poland and a Pizza Hut franchise in Russia.

The company has an ambitious ‘3 x 3’ plan, envisioning tripling sales in three years, which it achieved between 2006 and 2008. The plan calls for 50 new restaurants to be opened in Central and Eastern Europe in 2009. The firm has become an important tenant in shopping malls since, with their multiple brands, they are able to rent larger spaces and obtain lower rental rates.

Their newest venture is a joint one with Starbucks, and they already have 11 franchises in Eastern Europe. Moreover, they recently purchased a casual dining restaurant chain in the US, which they eventually plan to bring to Eastern Europe.

One of the banks we visited is controlled by a Portuguese bank group, and is now the market leader in Polish mortgages. It gained its market share mainly through very aggressive lending in Swiss francs, offering homebuyers the lower Swiss franc interest rates as compared to the higher Polish zloty rates. About 57 per cent of their loans are in Swiss francs.

Of course, the danger to their clients, and eventually their loan portfolio’s health, is a possible devaluation of the zloty against the franc. This was a worry for us since, if the Polish zloty devalued markedly against the Swiss franc, the Polish mortgage holders would have difficulty in paying their mortgages.

The management claimed that, although the zloty has depreciated against the franc, clients have not had problems with repayments. This was because most of the mortgages were granted when the zloty was weak and also the lower franc interest rates means lower interest rates that help offset the depreciation. Nevertheless we are always mindful of exchange rate behaviour in view of what happened during the Asian crisis.

We continue to monitor developments and look for investment opportunities in Poland. It has a fascinating culture and history, as well as excellent business prospects.

Dr Mark Mobius is executive chairman at Templeton Asset Management.