Poland has been reclassified as a developed economy by S&P Global; it offers investors an attractive combination of growth and value

Even after doubling the performance of the S&P 500 over the past three years, the iShares MSCI Poland ETF trades at just over half the U.S. index's forward price/earnings valuation, according to FactSet.

S&P Dow Jones Indices has reclassified Poland as a developed economy, which is an upgrade for the country as the data provider had previously rated it as an emerging market. This has implications for investors, because stocks of Polish companies will be moved to different indexes - those seen as less risky for investors.

S&P Dow Jones Indices (a subsidiary of S&P Global) is giving plenty of lead time with its recent announcement about Poland ahead of the reconstitution of its indexes in September 2027, which will cause changes within index funds.

For example, Polish stocks will be moved to the S&P Developed BMI from the S&P Emerging BMI. BMI stands for "Broad Market Index." The change in the indexes means Polish stocks will go to the $41.8 billion State Street SPDR Portfolio Developed World ex-US ETF SPDW from the $17.8 billion State Street SPDR Portfolio Emerging Markets ETF SPEM.

The move to the developed-markets camp means much more investor money can be allocated to Polish stocks, because there are plenty of U.S. investors who want international exposure but prefer safer developed markets over emerging markets.

Then again, MSCI, another major provider of indexes tracked by exchange-traded funds, still considers Poland an emerging market.

"I think Poland is a catch-up story," Cullen Rogers, the chief investment officer of Wedbush Advisors, told MarketWatch. He said the difference in opinion between S&P and MSCI about categorizing Poland as developed or emerging "is where the opportunity sits."

"There is a maturation story - what used to be a manufacturing hub for Germany, [has turned into] a developed economy," with "a lot fewer handcuffs than most of the developed world," when it comes to regulation, he said.

Rogers called Poland "an under-owned economy," with its stock market valued at about 30% of the country's GDP, "against 50% for Germany and close to 100% for the U.S."

Combination of rapid growth and low valuation

This may illustrate the point Rogers made about Polish stocks being under-owned:

The iShares MSCI Poland ETF tracks the performance of the MSCI Poland IMI 25/50 Index, which covers about 99% of the valuation of stocks listed in Poland. The ETF's total return has more than doubled that of the SPDR S&P 500 ETF Trust over the past three years.

The iShares MSCI Poland ETF EPOL has soared over the past three years, outperforming the SPDR S&P 500 ETF Trust SPY by a wide margin. But the weighted forward price/earnings ratio for EPOL's portfolio is only 11.7, which is 57% of the forward P/E of 19.5 for the S&P 500 SPX, according to FactSet's data.

So EPOL provides an easy way to invest in a dynamic free-market economy while diversifying beyond U.S. stocks and paying a much lower price relative to companies' earnings estimates.

Poland's rapid growth and a catalyst this year

In a report last week on Poland's reclassification by S&P, market strategists at BCA wrote that the country's real GDP had more than doubled since Poland joined the European Union in 2004. They added that the timing of S&P's reclassification of the country was appropriate, "as Poland came up in recent discussions with clients in the context of a potential ceasefire in Ukraine and the reconstruction opportunities it could create." They also cited the "tailwind" of accelerating funding for Poland this year through the E.U.'s Recovery and Resilience Facility (RRF).

In an interview with MarketWatch, Isaac Schwartz, a portfolio manager at Robotti & Company Advisors in New York and chairman of the New Silk Road Forum, said that Poland had done a "phenomenal job for 20 years at sustaining real GDP growth" by "having a free market," even as the country's government has "stepped on a lot of toes by not following E.U. policies."

Schwartz agreed that Ukraine's eventual reconstruction would be "a long tailwind for Poland, for sure."

When asked about the classifications of countries as frontier, emerging or developed, Schwartz said he didn't like two features of the classifications. One is that "they are overly technical," and the other is that "they are extremely specific.

You can see how S&P determines a country's category here, and MSCI's framework for country classifications here. Each summarizes the technical requirements in a table.

Three examples of favored Polish stocks

Spencer Cibelli, a senior investment associate at Robotti, called Poland an "important, intertwined country," not only because exports make up such a large percentage of GDP (50% per BCA's estimate), but because low labor costs support a strong tech industry. "All the major companies, such as Microsoft and Amazon, have hubs in Poland," he told MarketWatch.

He is especially focused on Poland's videogame industry and named CD Projekt Red (PL:CDR) as an example. In addition to the locally listed stock, there is an American Depositary Receipt that is not sponsored by the company. The ticker is $(OTGLY)$. The ADR is traded over-the-counter. The primary depositary bank that listed the ADR was Citibank N.A.

CD Projekt Red is the developer of "The Witcher" series of videogames, as well as the "Cyberpunk" series. "The Witcher 3" was first released in 2015 and has won numerous awards. Additional content is still being released for the game, with the "Songs of the Past" expansion coming next year and a remastered version of "The Witcher 3: Wild Hunt" scheduled to be released on Sept. 29. Meanwhile, "The Witcher 4" is being developed, with no target date announced, although Cibelli expects it to be released within the next two years.

CD Projekt Red is the 12th-largest holding of EPOL, making up 2.6% of the portfolio, according to BlackRock.

With the success of "The Witcher," a renewed focus on quality following a difficult release of "Cyberpunk 2077" in 2070, the success of that game following updates and an expanded, and a more rapid release schedule, Cibelli "can see it becoming a European Take-Two." He was referring to Take-Two Interactive $(TTWO)$, which owns Rockstar Games, the developer of the "Grand Theft Auto" series.

Cibelli said the vibrant software industry in Poland in part comes from lower costs, but also from the country's long-term affection for Western culture, which began during its communist period that ended in 1989.

"You can make the same argument for AI - they should be beneficiaries, because raw IT talent is very strong. It is a well-rounded economy overall," he said.

Another game developer in Poland that Cibelli favors is Playway (PL:PLW), which specializes in simulation and other lower-cost "indy games" mainly distributed through Steam.

Playway has "stakes in hundreds of games" being developed in Poland, as it provides seed money to smaller developers in return for high ownership stakes when products are released," he said. This makes for a relatively rapid turnaround time for new games.

"A problem with CD Projekt Red is the huge titles that can take tens or hundreds of millions of dollars to release and promote. Playway releases maybe 40 games a year, [so the] stakes are lower," Cibelli said.

He named one more stock - the Warsaw Stock Exchange (PL:GPW). "When we found it, it was the cheapest stock exchange in the world, at eight times earnings," he said. GPW's forward P/E is now 16.1, according to FactSet.

GPW "is becoming a London-like hub for Eastern Europe, with more foreign listings over time, including Ukraine and Romania," Cibelli said. "The Polish government is pragmatic, and they are trying to build up the equity market and household participation in it."

He added that GPW has been "growing massively, with a derivatives market and a junior exchange called the NewConnect Market, which allows smaller companies to list at lower cost than the main exchange." He compared NewConnect with Nasdaq First North, which includes listings for 550 small companies in Nordic countries.

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-Philip van Doorn