What does the Polish upgrade say about EM? What does the Polish upgrade say about EM? What does the Polish upgrade say about EM?

What does the Polish upgrade say about EM?

Bonds 6 minutes to read
Althea Spinozzi

Senior Fixed Income Strategist

Summary:  Poland's recent FTSE Russell upgrade to developed market status may lead investors to take another look at the emerging market space, but EM troubles are not over yet.

Summer is clearly coming to an end. In the Nordic countries, the days are shorter, the breeze is a few degrees colder, and in Denmark people are lighting candles to ensure a hyggelig autumn.

Investors are also welcoming the new season after an intense summer that saw the bond market appearing to be on the verge of collapse on news of a developing crisis in emerging markets and an intensifying trade war between the US and some its largest trade partners, most notably China.

Fixed income is now at something of a standstill as investors wait to see if thing will worsen further before getting rid of their riskier assets.

It is clear that the lessons imparted by Turkey and Argentina just a few weeks ago were not particularly well-absorbed. Risk sentiment remains carelessly robust as investors seek relative value in lower-hanging fruits within the EM and the high yield spaces.

Their comfort comes from a financial sphere that seems determined to insist all is OK, even within the same EM space that so recently appeared to be coming apart at the seams.

The FTSE Russell has promoted Poland to “developed market” status, the first such new addition to these ranks in nearly a decade. It is certainly true that Poland has been one of the fastest-growing economies in Europe for the past few years, but its economic and fiscal performance has been tied very closely to the European Union’s post-financial crisis recovery. 

The obvious question here, I think, is whether Poland’s developed’ status exists upon a strong enough political and economic base to justify the term.

On Monday, and just as Poland was receiving its upgrade, the EU brought the country to court on charges that the right-wing government in Warsaw is violating judicial independence by setting an earlier retirement age for Supreme Court judges. The move was controversial, and even sparked protests in Poland, as some believe that such reforms enable the current regime power to overrule the Polish judiciary.

It is clear that although the country has achieved impressive economic development over the past few years, there are still issues within the political sphere that may cause a reversal, pushing it again towards EM status.

Nevertheless, now that the FTSE Russell has upgraded Poland, a broader base of investors will have access to the country’s financial market and this will boost the valuation of Polish sovereigns. The 10-year Polish Zloty-denominated government bond has a yield of  3.22%, down 60 bps from January 2017. 

The space that will benefit the most in the medium term is the Polish corporate space as companies will face lower costs of capital, hence we can expect more issuances in this space until the global economic backdrop changes between 2019/2020.

At that point, we fear certain contradictions within EMs will put further pressure on this space; when the economic cycle shifts into recession, EM sovereigns and corporates will be the first casualties.

It is not just Poland that illustrates this point, as even China is currently bringing a valuable lesson to the table. 

As many of you already know, one of the main topics within EM this year has been Beijing’s intent to deleverage its economy. At the same time, however, we see local governments planning to issue ‘special-purpose’ bonds totaling $200 billion. These bonds will be issued to fund infrastructure investment amidst a slowing economy. In this case, the worst thing may not be the fact that the Chinese government will increase its overall debt-to-GDP ratio, which already totaled 51% at the end of December 2017, but rather that this debt will mainly be absorbed by Chinese banks as these bonds will provide a low yield and will remain very illiquid, rendering them unappealing to real money.

This will add illiquid government debt to the Chinese financial sector’s already weak balance sheet, posing a great threat to the financial system as a whole. If things continue on their present path, however, one could maintain that the current, fragile equilibrium may continue for some time, thus making it more appealing to stay invested rather than waiting for a potentially distant downturn.
In this environment we believe that certain types of bonds allow investors to stay invested while selecting for specific risks while the economic backdrop changes. 

Many have been expecting a downturn for some time now, and investors who bet heavily on an equities decline over the past earnings season were hit hard by new highs. This is why it is crucial to enter these types of trade at the right time while remaining invested in more conservative assets which can remain resilient amid a sudden market collapse.

The investment grade space, excluding the BBB space in the US, offers exciting opportunities in keeping with this point of view, but for investors looking for short-term maturities (up to the end of 2019) there might be also opportunities in high yield US and selected EM corporates.

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000

Contact Saxo

Select region


The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.