A Tepid View of Eastern Europe ETFs

Amid a raucous year for emerging markets equities, Poland has been a bright spot. While the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) is lower by 1.4%, the iShares MSCI Poland ETF (NYSEArca: EPOL) is up nearly 10%. The Market Vectors Poland ETF (NYSEArca: PLND) is also higher by 10%.

At least one global bank thinks the time is right to take profits in Polish equities. JPMorgan downgraded Poland to underweight, citing the country’s pension fund reform efforts and stretched valuations, among other reasons.

“We think the re-rating of the Polish financials has gone too far. The biggest sector in Poland, financials, is now more than 2 SD expensive versus both Turkey and Russia on both 12m Forward PE and 12m Forward P/BV. As value is beginning to regain some ground versus growth on a global basis, we want to take some profits in expensive Poland,” the bank said in a note posted by Barron’s.

Assuming JPMorgan’s view of Polish banks is accurate, that could be problematic for EPOL and PLND, which allocate 51.5% and 39.9%, respectively, to the financial services sector.  However, the assessment of Polish banks does not necessarily factor in Poland’s solid currency, the zloty, and a current account surplus, a prized trait for emerging markets investors in the current market environment. [Zloty Lifts Poland ETFs]

“While valuations in Poland look overstretched, consensus EPS revisions look worse in Poland than the other big CEEMEA markets. We want to avoid expensive markets with deteriorating earnings,” said JPMorgan, Barron’s reported.