03 September 2019

The Polish Paradox—Declining Local Yields Despite Strong Domestic Dynamics

By Quentin Lafosse

Paradox: [n.] a person, situation or thing that seems to have contradictory or inconsistent qualities (Collins Dictionary)

Growth Parting Ways

Notwithstanding their undeniable economic linkages, Poland and core eurozone countries, in particular Germany, have experienced meaningfully divergent growth over the last two years (Exhibit 1).

Exhibit 1: Real GDP Growth (Annualized, Quarter-Over-Quarter)
Source: Haver. As of 30 Jun 19. Select the image to expand the view.

With a technical recession in Germany potentially looming—given weakness in manufacturing and the vulnerability of its export-based model to weak global trade—growth in Poland by contrast has seen limited impact.

Structural or Cyclical?

Whether the current deviation is structural or inherently cyclical, evidence points to this outperformance being persistent as it is driven by a combination of accommodative fiscal policy in Poland and unfavourable external conditions in Germany.

Wages in Poland are booming and consumer confidence is at all-time highs. EU funds are contributing to infrastructure investment and despite a sizable fiscal stimulus, public finances remain strong due to a consistent track record of budget under-execution combined with upside revenue surprises, stemming partly from improvements in tax collection (Exhibit 2).

Exhibit 2: Fiscal Execution Consistently Outperformed the Finance Ministry’s Budget Targets
Source: Finance Ministry. As of 31 Dec 18. Select the image to expand the view.

Poland’s ruling Law and Justice Party (PiS) has seen a boost in its popularity on the back of increased fiscal spending, as evidenced by its recent success in the May 2019 European parliamentary elections. This surge in public opinion is timely for PiS ahead of a crowded electoral calendar with national as well as presidential elections in the coming months.

The Polish paradox lies in the stark disconnect between a robust economy and the performance of the local bond market. Contrary to ongoing macro strength, the impact of global growth concerns and the ongoing search for yield entirely outweighs domestic dynamics. Consequently, local Polish government bonds yields have mirrored (and outperformed) German bunds despite opposing growth dynamics. (Exhibit 3).

Exhibit 3: Local Yields—Poland vs. Germany
Source: Bloomberg. As of 19 Aug 19. Select the image to expand the view.

Western Asset’s View

At Western Asset, we have been investing in local Poland government bonds as an attractive alternative to negative-yielding core eurozone bonds given their still-compelling relative valuations (Exhibit 3).

We believe that it is highly unlikely that Polish monetary policy will tighten while the ECB embarks on yet another round of easing. Furthermore, although incrementally picking up, inflation remains under control allowing Poland’s central bank to maintain an unequivocally dovish rhetoric, recently alluding to further monetary support should growth prospects deteriorate. In contrast with its “emerging market” labelling, Poland has benefited from a “safe haven” status, and continues to perform as such during periods of volatility, acting as a risk-off “hedge” in diversified fixed-income portfolios. As more investment-grade debt yields become negative, Polish bonds will stay in the focus of investors.

Will the market converge toward the macro reality or is it a leading indicator of what lies ahead? Western Asset’s view is that, barring significant idiosyncratic developments, external forces will continue to drive valuations. On one hand a positive shock to European growth via, for instance, a larger fiscal stimulus would likely trigger a sell-off in core European rates and impact Poland government bond prices negatively. Conversely, a continued period of protracted weak growth in the eurozone, particularly in Germany, makes it more likely than not that Polish bond yields stay lower for longer.

© Western Asset Management Company Ltd 2020. 当資料の著作権は、ウエスタン・アセット・マネジメント株式会社およびその関連会社(以下「ウエスタン・アセット」という)に帰属するものであり、ウエスタン・アセットの顧客、その投資コンサルタント及びその他の当社が意図した受取人のみを対象として作成されたものです。第三者への提供はお断りいたします。当資料の内容は、秘密情報及び専有情報としてお取り扱い下さい。無断で当資料のコピーを作成することや転載することを禁じます。
ウエスタン・アセット・マネジメント・カンパニーDTVM(Distribuidora de Títulos e Valores Mobiliários)リミターダ(ブラジル、サンパウロ拠点)はブラジル証券取引委員会(CVM)とブラジル中央銀行(Bacen)により認可、規制を受けます。ウエスタン・アセット・マネジメント・カンパニー・ピーティーワイ・リミテッド (ABN 41 117 767 923) (オーストラリア、メルボルン拠点)はオーストラリアの金融サービスライセンス303160を保有。ウエスタン・アセット・マネジメント・カンパニー・ピーティーイー・リミテッド(シンガポール拠点)は、キャピタル・マーケット・サービス(CMS)ライセンス(Co. Reg. No. 200007692R) を保有し、シンガポール通貨監督庁に監督されています。ウエスタン・アセット・マネジメント株式会社(日本拠点)は金融商品取引業者として登録、日本のFSAの規制を受けます。ウエスタン・アセット・マネジメント・カンパニー・リミテッド(英国、ロンドン拠点)は英金融行動監視機構(FCA)により認可、規制を受けます。当資料は英国および欧州経済領域(EEA)加盟国においては、FCAまたはMiFID IIに定義された「プロフェッショナルな顧客」のみを対象とした宣伝目的に使用されるものです。
業務の種類: 金融商品取引業者(投資運用業、投資助言・代理業、第二種金融商品取引業)
登録番号: 関東財務局長(金商)第427号
加入協会: 一般社団法人日本投資顧問業協会(会員番号 011-01319)