Weekend Reading #9

Taylor Barber on Unsplash

This is the ninth edition of our weekly newsletter, Weekend Reading, sent out on Saturday 23rd March 2019. To  receive a copy each week directly into your inbox, you can sign up here.

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The perfect place to invest in transformation.

This week we attended PKO Bank Polski’s annual Capital Markets shindig in London. The conference was organised to aplomb, with interesting companies, generous hospitality and a relaxed vibe that served as the perfect backdrop for our team’s strict “zero tie” dress code – if it’s good enough for Goldman Sachs, it’s good enough for us!

A massive thank you to PKO BP for including us, and to the fantastic people and companies we met, who opened their ears and their minds to our unusual but hopefully not uninteresting story. 

Champagne and history.

After the first day of the conference had ended, everyone piled over to The National Gallery for fine art and even finer conversation. After dinner, historian Adam Zamoyski took to the stage to remind us of the hardships that Poland has faced throughout its long and difficult journey. He spoke eloquently for thirty minutes, without notes, the history of the place burnt into his brain.

Like many geopolitically important countries, Poland has spent much of its history having things – mostly terrible things – done to it. Finally this is changing, as the country recasts itself as a serious player across industries and an autonomous agent on the world stage. The companies we met at the conference are at the vanguard of this movement.

We're not interested in every company.

Poland is home to an eclectic mix of companies, some of which are well positioned to benefit from non-linear change. That change can be either positive or negative. And Poland is the perfect place to express our transformative investment philosophy. 

We’re not value investors, nor are we necessarily pure growth investors, we’re change investors. That means we’re only interested in companies that are exposed to transformation in the short to medium term. And we believe the structure of the Polish market makes it a great place to trade this theme. The economy is strong and stable, and the Zloty is one of the most stable EM currencies, effectively tracking the Euro thanks to Poland’s close economic ties with the Eurozone. 
 
There’s a well established (and well run) stock exchange with decent liquidity and a burgeoning mix of financial products providing exposure to different sectors and asset classes. And now the popularist political backdrop has served up a fat dose of fiscal stimulus in 2019, equivalent (according to PKO’s economists) to a rate cut of 250-300bps! It seems Christmas has come early – or late, depending on your market timing.

There is also a second Poland, which investors barely ever talk about. Rural areas represent 93.2% of Poland’s total landmass and they are still inhabited by nearly 40% of the population (around 15 million people). This “country within a country” means the long term growth potential of Poland shouldn’t be underestimated. What's really fascinating is that rural population share has been RISING since the early 2000s.
 
This is because of mass emigration, as a result of Poland’s access to the EU, which has resulted in labour shortages and upward pressure on wages. This structural trend in concert with 2019’s fiscal stimulus aimed at the consumer (particularly the rural consumer) means a thematic opportunity in quality domestic consumer-oriented companies. Dino Polska is one name which has performed sensationally since its IPO in 2017, partially on the back of these trends.

Why we love Poland. 

All of our core investment themes are at play in Poland and many of the companies we met at the conference stand to benefit from the transformative forces that we explore in our investment meetings and blog posts.

“Real AI” isn’t about far-fetched utopian scenarios that may or may not materialise decades from now. We’ll leave that to sci-fi writers and management consultants. Our approach to investing in AI is about practical, near-term applications that drive bottom line improvements to company performance. We’ve been keen followers of polish debt collection company Kruk for many years, noting how it’s pioneered the use of big data to accurately value its portfolio and drive repayments. The company was unfairly dragged into the GetBack debacle and has recently struggled to apply its innovative “amicable” settlement model in new markets away from its central European stronghold, but it’s well managed and crucially, well positioned to benefit from accelerating advances in machine learning. Positive revaluations in the most recent quarterly results were, according to CFO Michał Zasępa, partly due to the use of machine learning in its collection process. We’re excited about this company.

“Finance 2.0” was also on display at the conference, with the entire spectrum on show. From old school banks that seemed reluctant to embrace digital business models to innovative companies like the Warsaw Stock Exchange, whose NewConnect trading facility now drives a multitude of new listings.

“Competition for time” – our third super theme – loomed large in our discussions with companies ranging from Central European Media to 11 Bit Studios. Gaming is big business in Poland and the country is fast emerging as a hub for a multitude of gaming companies aided and abetted by a supportive government offering a number of incentives to game developers. We await the release of 11 Bit’s next game (enigmatically referred to as “Project 8”), both as investors and keen gamers!

Finally, we got the opportunity to observe how our fourth (and perhaps most pervasive) investment theme is playing out in Poland. “The Great Game” alludes to a new paradigm in international relations, with the US and China’s dialectic ideological models creating hard choices and huge opportunities for the long tail of countries that rely upon the patriarchy of superpowers. Meeting with state-owned mining company JSW gave us the opportunity to consider how this super-theme might assert itself in Poland.

Poland has an ambivalent relationship with China. The US has been the country's most important strategic post-war ally and remains so, yet Poland must acknowledge the growing importance of China and the immense economic opportunities presented by its ambitious Belt and Road initiative. Poland risks getting caught in the middle and we believe there will come a time where it must choose, with huge implications for foreign policy and domestic economics. For the time being, Poland seems to be hedging its bets – the Łódźkie region's cooperation with Chengdu and Sichuan province being a prime example of its willingness to entertain the advances of China whilst maintaining the trans-Atlantic alliance. JSW’s management team flagged the incredible changes occurring in the city of Łódź, which has been recast as a key logistics hub for the whole of central Europe, much to the delight of the Chinese, who are interested less in urban regeneration than facilitating cross-continental rail freight. If this narrative continues to unfold, Polish mining, logistics and infrastructure sectors stand to make big potential gains.

Our next adventure.

Next week we’re visiting investors and entrepreneurs in Turkey, another geopolitical influencer and a country that’s always mediated between East and West. If the conversations we have there are as productive as those enjoyed with our Polish friends this week, we will be very happy indeed. 

We are trying to do something different with our business, so it’s exciting to find kindred spirits who aren’t afraid to open their minds and consider new ways of doing things. We certainly found that at PKO BP’s conference, and we hope to find it in Turkey, too.

Beyond the obvious.
+ Asset managers slash expenses as ‘Feemageddon’ bites
+ Facebook isn’t going after Bitcoin, it’s going after the Dollar
+ China: from copycats to innovators
+ What could possibly go right? The utopian vision of AI
+ Global game market trends and forecasts from 2018 to 2019