The unqestionable leader of the 1990s were companies from building industry that was dynamically developing. Flats in all of the People’s Republic of Poland period was rather deficitient good.The main reason of that was insufficiency of communistic economy, old technology and too high employment. Because of all these components, the cost of builiding was really high and there was not much flats, despite growing demand. It is worth to mention, that builded apartments was made of low quality materials, often hurriedly and carelessly. That is why, after communist regime collapsed, in 1990-1999 builiding production increased almost twice. Average annual increase equaled about 8%, taking fluctuations into consideration. As the main reason of that, we have to mention:

·         Increasing number of opportiunities and economy’s tendency to invest (rosnące możliwości I skołonność gospodarki do inwestowania w efekcie utrzymującego się przez wiele lat wzrostu gospodarczego)

·         High demand in almost all branches of building as a result of long-term negligence

·         Necessity to meeting West building standards

·         Inflow of foreign investments as an impulse of development in different branches and factor which was creating a demand for infrastructural and industrial building

Investment processes from 1993 to 1997 was characterized by increasing dynamic of expenditure. From 1996 to 1997 the rate of investment was higher than 20% (w latach 1996-1997 roczne tempo wzrostu inwestycji przekraczało 20%). Unfortunately, in 1998 the investment trend decreased a little bit, which was caused by downturn of Polish economy.

[1]On the graph attached above, we can see that from 1997, when WIG-BUDOW index was invented, it was constantly increasing its value to gain a peak in 2007. Thanks to good economic situation, it was the time when not only building companies was developing, but also enterprises from related branches was getting a favorable financial results. As we can see on the figure, it was good moment to sell shares invested in WIG-BUDOW, because index’s value was 7 times bigger than in the beginning in 1997. Than after some time, WIG-BUDOW started to loose its value, mainly because of financial crisis, that also affected a building sector. Poland as an emerging market, suffered a lot because of it. Interest rate was constantly growing, because of changes in monetary policy and the end of the day make real estate market weaker.. Unfortunately, situation changed a little bit in 2008, when amount of transactions on real estate market was decreasing, because of more restrictive credit politic connected with mortgage credits. It is worth to mention that in 2007 Poland gained the opportiunity to host a football championship in cooperation with Ukraine. At the beginning, this situation was considered as a great chance for building market. Back then, analytics was anticipating big boosts and higher rate of return from investment on building companies. [2]Unfortunetly, as the time was passing by, it occurred that situation is getting more and more difficult. The WIG-BUDOW index in 2012 was 5 times smaller than in the beginning of 2007. Some of smaller building enterprises gone bankruptcy and others, including the biggest one, now have enormous problems. Only one company, which is Budimex protected itself from financial troubles. This seems to be very unpredictable situation, because everybody was expecting rather heyday for building companies. Among the reasons that złożyły się na powstanie takiej sytuacji we have to mention about strong competition between building enterprises, which leaded to situation, when companies offered really low margin in order to get a job. In a mean time, prices of raw materials had grown. Now, the only solution for the companies zagrożonych upadłością is deep restructuring process. However, economic situation after 2007 have been a time of high volatility and this is a problem should be examine in wider perspective. In this chapter I would like to focus more on the period from 1998 to 2007.

70s decade, when Poland was under the rule of Edward Gierek, was the heyday of the Exbud company. In that time, on world markets boom continues.Arabic countries were selling exceptionally great amount of petroleum

and they gained a lot of petrodollars from it that they were looking to

invest.Meanwhile, First Secretary of the Polish United Workers’ Party announced his willing to launch a program to modernize Poland’s outdated industry, encouraging foreign investment and taking multibillion dollar credits from West and from the previously mentioned, Arabic countries. In that case, apart from Polish citizens, also investors and creditors had reasons to be contented, since their capital yield was higher than in European bonds.

Unfortunately, much of the money borrowed by the Gierek’s government was wasted on ill-considered industrial projects, and contributed to a $40 billion debt that is still being repaid 12 years after the end of Communist rule.

Nevertheless, majority of the achieved capital was invested into the South West region of Poland, that make them one of the fastest developing regions in Poland. Not only, because of the money they had received, but also because of the natural resources which they had. Exbud, previously known as Enterprise of the Export of Construction and Technical Services (Przedsiębiorstwo Eksportu Budownictwa i Usług Technologicznych), founded in Kielce in 1977, definitely took advantage of it.

With the charismatic leader ahead, Exbud had soon became the most important company of that area. Witold Zaraska, as soon as he took a control under the enterprise, inserted the capitalist mode of management. The company was exporting their products abroad, employment was growing and thanks to that, Exbud was gaining enormously high profits, which in comparison to other enterprises from building trade was quite impressive.

At the end of 70s decade, Muammar Gaddafi, ruler of the Libyan Arab Republic, deposited great amount of dollars, achieved from export of Libyan petroleum, in Polish national banks. Unfortunately, few years after that, Gaddafi’s capital disappeared and Poland was not able to return the money. After negotiation, Polish government proposed alternative solution. In that time, Libya was developing extremely fast, they needed new roads, airports, factories, mills, refineries, hence Poland offered their building services as debt return. (Dług miał być zwrócony w postaci rozmaitych usług, głównie budowlanych. A że Libia gwałtownie się rozwijała, potrzebowała nowych dróg, rafinerii, lotnisk i całych fabryk z rozmaitych branż, propozycja została przyjęta z zadowoleniem.) Thanks to that offer, Exbud gained great contract, which was a breaking point for the history of the Polish building company. In 1981 Exbud employed over 3 thousand workers aboard. What is more, since 1982, the company had opened new branches in Budapest, Praha, Vienna, Cologne and Berlin and what is also, worth mentioning, that was the first ever polish branches opened in Federal Republic of Germany. Additionally, Exbud was one of a few companies in Polish People’s Republic that had some of free cash and they were able to built their own modern skyscraper. In 1990, Exbud finally became joint-stock company, but quite complicated privatization

regulations forced executive board of the company to find foreign investor to buy part of enterprise’s shares in order to launch Exbud to Stock Exchange. Building enterprise was quite a tempting offer for many other foreign companies, but eventually ITI from Luxemburg, unpopular enterprise back then, bought stocks of Exbud. However, Witold Zaraska had still the biggest share of the company. In 1991 Warsaw Stock Exchange was founded, partly because of Zaraska initiative. Exbud was developing very well and their performance on WSE was a real success. Then, Exbud was growing more and more, few years later new companies was connected with a big holding, among them was Exbud-Media. However, soon the market was getting more severe and building recession was approaching to Poland, which was reflected in ill-fated investment that was not bringing expected profits. Western companies was looking for an opportunity to invest a capital and to buy Polish emerging enterprises, but their offers was constantly rejected by Witold Zaraska. However, situation in Exbud and in whole building trade was getting worse. More competitors had appeared on the market, among them was Mitex conducted by Michał Sołowow. In order to rescue their weaker situation, Zaraska decided to sell dependent enterprises, but it did not bring much profit and Exbud was deeply in debt. There was no other solution, than searching for foreign investor to take over company and the best offer was presented by Swedish company named Skanska. In the end of the day, in 2001 Skanska bought Exbud for 45 zlotys per share and in 2002 was withdrawn from WSE.

 sources:

Edward Gierek, Polish Leader from Decade 1970-1980, Jagoda Urban-Klaehnm, 2001

http://www.strefabiznesu.echodnia.eu/artykul/byl-jak-krol-niezwykla-historia-kariery-witolda-zaraski-czesc-i-24112.html

http://www.strefabiznesu.echodnia.eu/artykul/michal-solowow-zarobil-miliony-na-exbudzie-exbud-stracil-ich-100-25326.html

Próchnik is a 58-years-old company founded in Łódź. Dr A. Próchnik’s  Clothing Industry Plant started its economic activity in 1948, by nationalizing clothing plant that had been conducting since 1939 by Martin, Norenberg and Krauze in Łódź. Firstly, only ladies’ clothes had been manufactured, before Próchnik company expanded its production of men’ clothes. Enterprise was getting more and more popular year by year, which effects in opening new factories in Poland. In 70s, Próchnik was considered as a leader in clothing industry, that was focus on outer garment like jackets and coats. In 1990, Próchnik was transformed into joint-stock company. Year after, in 1991, Próchnik appeared on the Warsaw Stock Exchange as one of five first enterprises. It’s worth mentioning, that from the first five, only Próchnik is conducting their business till now, which is really impressing.

In times of People’s Republic of Poland, coats with a Próchnik label was considered as luxury, nowadays economic situation of the enterprise presents worse. Since 1994, the company has been suffered a lot. In 2008, when Próchnik was celebrating their 60^th anniversary, situation in a company seemed to improve, demand for their products was rising. Unfortunately that was not enough to achieve better financial result and better perspective for the future, which is reflect in a figure below. The reason of such poor company’s performance is unceasing conflict in an executive board and continual and stormy ownership changes.

In 1993, during first big hossa on polish stock market, a lot of investor bought shares of Próchnik, hoping to get a enormously higher return from the investment. That financial hype was not completely unfounded, because the company was planning to make a holding, connected three clothing manufacturer: Vistula, Wólczanka and Próchnik itself. Alas, none of these plans was realized.

In a half of 1990s, the owner of Próchnik was National Investing Fund Piast and they connected to the enterprise other, less popular, clothing companies. Unfourtunetly, when it occurs, that Próchnik was not able to make such earnings as Piast expected, Próchnik was sold and soon after this happened, their stocks achieve really low values. Since that time, Próchnik has been one of “speculation enterprises”. As a result, the company has not had a serious owner since more than 10 years.  

to be conituned

sources: www.bossa.pl, http://www.bankier.pl/wiadomosc/Tragedia-czy-kiepska-komedia-w-Prochniku-1751822.html, http://www.prochnik.pl 

Communist regime collapse initiated process of economy liberalization, which was reflected than in reactivating stock exchange market in Poland. In a age of 1990s, when Poland was eager to join European Union, process of economic changes even accelarate. The beggining of XXI century was definetly a good start for Polish capital market and now it is the most dynamic developing market on the continent. In Eastern Europe, Warsaw Stock Exchange is a leader in terms of key factors which reflect the stage of its development, such as capitalisation, trading value (wartość obrotów) and the number of new market entries.

¹Trading on Warsaw Stock Exchange takes place on following markets:

• The Main List has been operating since 16th April 1991. It is a regulated market oversee by Polish Financial Supervision Authority. On the Main List there is a trading platform for shares, bonds, pre-emptive rights, rights to shares, investment certificates, structured products, warrants, ETFs and derivatives.

• WSE derivatives market has started in 1998. Investors can choose from:

  - WIG20 and mWIG40 futures

  - Currency futures (USD/PLN, EUR/PLN and CHF/PLN)

  - Stock futures for the most liquid companies

  - Index option

  - MiniWIG20

• NewConnect was established in 30th August 2007. This market was designed for small, dynamic developing start-ups. In 2011 there was 172 new entries and it was the biggest, noted amount of all the alternative markets in Europe.

• WSE Emergy Market has been oparating since 11th December 2010. WSE EM broaden Warsaw Stock Exchange operation, of the commodities market. It is a transaction platform for energy, intended for all categories of participants on the energy market.

Much common thing for all developing markets is high level of risk and great volatile, which appears in almost all definition. And it is relate not only with finance, but also with a political, regultory and social area.

¹Despite quite high potential growth, investment in emerging market are weighted by risk. These risks relate not only to the normal uncertainties of any business, but also to the problems specific to the emerging economies. These concerns fall into three broad categories:

• political risk

• macroeconomic risk

• currency risk

When it comes to the political risk, emerging countries’ legal system is definetly an important issue to raise. Particulary, western enteprises should take this into consideration planning their market expansion on the emerign markets. ²In general, they lack fully developed legal system and the bodies of commercial law and practise normally found in the Western nations. The dispute resolution process in an emerging market court system is extremly slow and final judical decision on commercial matter can easily take 5 to 10 years before appeals are expired. Even then, the ability of a plaintiff to enforce a favorable judgment may pose additional problems of a lengthy duration.

Among other factors that influence political risk of emerging countries there are corruption and grey market, which will be described broader in a further subsections of this chapter.

From the investor’s point of view, macroeconomic risk is mainly connected with a market cycle, which make an impact on investment’s rate of return development. Investing in emerging markets, macroeconomic risk is a problem, which must be taken into account by both an foreign enterprenuer and portfolio manager. Developing countries are known for repatative boom-and-bust cycles, caused mainly by botched government policies.

³Currency risk can be defined as the risk of an investment’s value changing due to changes in currency exchange risk or the risk that an investor will have to close out a long or short position in a foreign currency at a loss due to an adverse movement in exchange rates. Due to emerging markets’ political and economic instability, currency which is valid in these countries is prone to strong fluctuation in comparison to developed markets.

Emerging market is a country, that according to the World Bank’s data has a low or medium GDP per capita or has a less-developed capital market. Approximately 30 countries are considered as markets that are in transtion to higher level of economic standard. The „emerging market” term was coined by International Finance Corporation to define all the less-developed countries. Based on that list, the Emerging Market Index was created. On the beginning, in 1981 index contained only 9 countries and by 2002, number of them had increased to 33. Neverthelss, there is no strict list of emerging markets, every financial institution has their own idea of how emerging market should look like. Some of them are really extensive, including such countries like Kenya with a per capita income of $350 to Mexico with per capita income $5000. Tables inserted below show countries indentified as emerging, according to FTSE Group, International Monetary Fund. As we can see, all the  financial institutions listed Poland on its specifications.

Typicall emerging markets are countries included in the BRIC (alternatively call Big Four) which stands for Brasil, Russia, India and China. Many experts agree that all this countries are at a similar stage of newly advanced economic development. In some sources we can also read about BRICET (BRIC + Eastern Europe and Turkey), BRICS (BRIC + South Africa), BRICM (BRIC + Mexico), BRICK (BRIC + South Korea), but all these terms are not such popular as simple BRIC term.

Another popular term is Next Eleven, that was first used by the Investment Bank Goldman Sachs and worldwide known economist Jim O’Neill in a research paper. Behind this term stand such countries as Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, Turkey, South Korea and Vietnam. All of these countries was deemed as economies of high economical potential. Goldman Sachs chose this countries, following earlier determined criterias such as macroeconomic stability, political maturity, openness of trade and investment policies, quality of education.

³Initially, investing in emerging markets was not popular among foreign investors and the net private portfolio investment in these countries was negligible because of the lack of available instruments in which foreign investors could invest and the perceived high-risk volatilty of these markets.

However, In 1989, after communist regime collapsed in a great amount of emerging countries, including Poland, economic transformation encourage foreign investors to invest their capital on these initially uncertain markets. That tendency has been deepen, thanks to privatization and economic liberalization on that area. Net private portfolio inflows to emerging markets peaked in 1994 at US$113 billion, only to decrease sharply in the following years, mainly as a result of the widespread financial turmoil that affected these markets. Financial crisis in Mexico (1995), Asia (1997) and Russia (1998) caused investors to retreat their capital from emerging markets. Nonetheless, shortly after those incidents, in 2000, downward trend was stopped and inflows to emerging markets started to gradually increasing again. However we cannot perceive all the emerging markets in the same way, each country is different and when we are willing to invest in one of them we have to consider some of factors that could influence future rate of return. Among these factors there are: past performance, market efficiency, global integration and a method of valuation emerging market securities.

It’s hard to formulate one strict definition of emerging market. Each of them is distinct country with its own identity and culture. On the emerging market lists we can find countries like India or Nigeria struggling with such problems as racism, sexism or religious discrimination. On the other hand on  the same lists there are such countries like Hungary, Czech Republic or Poland, where these obstacles are not so important in comparison to others like poor system of law enforcement, currency devaluation,  corruption or nepotism.  

This divergence between countries that are listed in the rapports  prepared by various financial institutions  arise dispute whether Poland is still emerging market or maybe already not. Conflicts in this area, makes the topic even more interesting and worth rising. In my bachelor thesis I would like to prove, through a series of analysis and surveys,  that Poland don’t deserve the “developed country” name. In further part of the thesis, analysis of polish market after fall of the communist regime and transformation will be elaborated.  Additionally economy of Poland will be compare with other countries that are perceived as emerging.  

Another important issue I would like to present in the thesis is attractiveness of the emerging market from the investor’s point of view.  As I’ve already mentioned before, highlighting features of typical developing country, many investors, putting their capital in a emerging market, are expecting higher rates of return. They perceive these nations as having growth opportunities that are superior to their home countries.  In the thesis I would like to check if it is only a investors’  wishful thinking or it is indeed  true.  With this end in view, in a further part of the thesis I will present short history of Warsaw Stock Exchange and carry on investigation how much could gain or loose the potential investors if they invested in a companies or stock indices listed on Warsaw Stock Exchange.   

Attractiveness of Emerging Market from the investor’s point of view

1.  Brief history of Warsaw Stock Exchange after the fall of communist regime
2.  First five listed companies- Tonsil, Próchnik, Kable, Exbud, Krosno- and analysis of their current economic situation and rate of return
3. Analysis of WIG20 index (1991-2012), NewConnect index and Catalyst index
4. Analysis of other stock market indices
5. Rates of return from polish market in comparison to rates of return obtained on developed markets

Opnening bachelor’s thesis I would like to start with a question: what actually is a emerging market. There is as many definition as many possible sources where we can find the anserw.

Before the „emerging market” term was interposed, financiers used to name less developed countries in comparison to, for expample, Western Europe by the acronym LEDCs. In ‘70, countries described by this abbrevation was particullary interesting for the potential investors, who were ready to accept higher rate of risk in order to achieve extraordinary profits from the investments in these economies. Later, mainly because of negative connotation, the „LEDC” name was substiute by the „emerging market” name.

Typicall emerging markets are countries included in the BRIC (alternativly call Big Four) which stands for Brasil, Russia, India and China. Many experts agree that all this countries are at a similar stage of newly advanced economic development. In some sources we can also read about BRICET (BRIC + Eastern Europe and Turkey), BRICS (BRIC + South Africa), BRICM (BRIC + Mexico), BRICK (BRIC + South Korea), but all these terms are not such popular as simple BRIC term.

Another popular term is Next Eleven, that was first used by the Investment Bank Goldman Sachs and worldwide known economist Jim O’Neill in a research paper. Behind this term stand such countries as Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, Turkey, South Korea and Vietnam. All of these countries was deemed as economies of high economical potential. Goldman Sachs chose this countries, following earlier determined criterias such as macroeconomic stability, political maturity, openness of trade and investment policies, quality of education.

According to Investopedia ¹emerging market is a nation’s economy that is progressing toward becoming advanced, as shown by some liquidity in local debt and equity market and the existence of some form of market exchange and regulatory body. Emerging markets generally do not have the level of market efficiency and strict standards in accounting and securities regulation to be on par with advanced economies such as United States, but emerging markets typically have a physical financial infrastructure including banks, a stock exchange and a unified currency. As it was mentioned before it just a one of defintions among many others.

As well as all of these definition are similar, we cannot draw up one constant list of emerging markets.² Some of them are really extensive, including such countries like Kenya with a per capita income of $350 to Mexico with per capita income $5000.

However, all of these anserws have for sure common denominator and mutual characteristic features.

First feature that we can highlight is high rates of return from investments. Neverthless is not a rule for each developing country. Some of them provide just the same income from investment as advanced economies. So we can rather reckon this feature to some kind of a legend that is popular among investors wanting to get an extraordinary profit.

Much common thing for all developing markets is high level of risk and great volatile, which appears in almost all defintions. And it is relate not only with finance, but also with a political, regulatory and social area. Which is also link with a policymaking process and distinction between commitment and flexible policy and proofs to find … ( i próbami znalezienia złotego środka na linii wyznaczonej przez te dwie koncepcje). Government in some countries decide to lead a stable policy to encourage investors to locate their capital in this countries. On the other side, some countries prefer flexibility as a flexibility is needed to respond to unexpected developments.

Last substantial features is lack of a history of foreign investment and transition between developing and developed economy, that is trully defined what we can call emerging market.

1. Rationale of the chosen subject of the thesis- Starting divagation about the subject of the thesis I would like to ask the question: what is an emerging market and if polish market can be defined in this way. There are many different anserws to that question. In some sources we can see that Poland is on the list of emerging market, but somewhere there isn’t.

2. Main hypothesis- Investigation whether Poland is still an emerging market or not.

   Main aim of thesis- proving that Poland is still an emerging market and analysys of the potential income from the investment in polish market from the foreign investor’s point of view.