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Fish versus ponds

This week Poland left the FTSE Emerging All Cap Index and joined the FTSE Developed All Cap Index.

The promotion is an acknowledgement of the transformation of Poland’s capital markets and overall economy. These announcements are rare, high-profile, and the culmination of a long and complicated review and implementation process.

We sometimes see concern from stakeholders and market participants in advance of these promotions. And in the days before the implementation, there is sometimes a sell-off of some stocks that will have a lower weighting in the developed markets indexes than they did in emerging markets equivalents

It is true to say that the process is long and can be challenging for candidates, as it involves a rigorous analysis of the readiness of a country’s capital market using 21 quality-of-market criteria, as well as a consultation with an advisory panel comprised of market participants at the most senior level.

And new arrivals often go from being a big fish in a big pond to being far smaller in a much larger pond. The FTSE Developed Index is approximately 10 times the size of the FTSE Emerging Index (see chart below).

Source: FTSE Russell, data as of September 29, 2017.

This is true in Poland’s case: It left the FTSE Emerging All Cap Index (where its weight, as of March 2018, was 1.33%) and joined the FTSE Developed All Cap Index, where its projected index weight will be 0.154%*.

However, as we argue in our recent paper - Poland, the journey to Developed Market Status - the developed market is open to a much broader and deeper range of investors.

The benefits of an open capital market accrue both to the country concerned and to overseas investors: for the country, investment can be financed more cheaply by accessing overseas savings rather than relying solely on domestic capital; and outside investors gain access to greater growth opportunities, as well as an additional source of diversification.

These moves allow local corporates to engage more actively with those funds that deal with developed markets, reduce the cost of capital, and being classified as a developed market helps companies attract a lower equity risk premium, which is important for valuations and cost of capital.

In 2017, the Warsaw Stock Exchange witnessed a healthy increase in trading volumes and a large increase in the capitalization of local companies (see charts below).

Source: FTSE Russell. Data as of March 30, 2018. Projected data is based on a number of assumptions that may ultimately prove to be incorrect. Please see the end for important legal disclosures.

Together, these statistics and initiatives indicate a deepening and strengthening of Poland’s capital markets for the years to come. Nothing is certain, but, as Marek Dietl, CEO, Warsaw Stock Exchange said when the promotion was announced: “Poland’s upgrade to Developed Market Status is a challenge, which we are ready to face.”

*Projected data is based on a number of assumptions that may ultimately prove to be incorrect. Please see the end for important legal disclosures



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