At the edge of the abyss, the most beautiful flowers bloom. According to Sebastian Kahlfeld, senior fund manager at Deutsche Asset Management (DWS), Poland, Ukraine’s neighbouring country, offers a proxy opportunity to invest in Ukraine’s reconstruction.
Poland’s GDP growth stands at an annual rate of 4.5 percent, and the country has a strong domestic market. Portfolio manager Sebastian Kahlfeld from DWS regards Poland as a top investment destination among emerging markets. The fact that it borders Ukraine, which is engaged in a war with Russia, creates additional return opportunities, he argues.
Trade relations between Polish and Ukrainian companies are strong, he points out. Should a peace agreement be reached, Poland’s construction sector will benefit, given that its geographical location allows for a swift response in Ukraine’s rebuilding efforts. Trump, who claimed during his election campaign that he could resolve the conflict in a single day, has initiated negotiations with Putin.
With a potential end to the war on the horizon, Ukrainian stocks are attracting attention. Shares such as MHP SE and Kernel Holding, both in the agricultural sector, have achieved returns of 60 and 110 percent, respectively, over the past six months. Kahlfeld refrained from commenting on individual stocks but views the developments in Ukrainian equities primarily as speculative movements: “Nothing is certain at this moment. There is hope for an end to the war, but as long as no definitive agreements have been made, these market movements remain largely speculative in nature.”
Kahlfeld prefers to invest in Poland’s robust economy, which will indirectly benefit from the recovery scenario. Until recently, it was still taboo to mention money and war in the same breath. Even though defence stocks are soaring, the purchase of cheap Ukrainian assets was “not done”. As the war’s end seems to draw closer, the topic is coming up more frequently. Particularly the Americans, who are both geographically and emotionally more distant from the conflict, are increasingly showing interest in investing in Eastern Europe.
Companies are ‘politically blind’
In European politics, the war remains a sensitive and controversial subject, but business continues as usual and appears to be ‘politically blind’. As an investor in emerging markets, Kahlfeld frequently travels, and for this conversation with Investment Officer, he is calling from India. He emphasised: “Companies are extremely creative in finding ways to sell their products. During my trip to India, I encountered European brand names in the most unexpected places, just as they also appear in Russia despite trade restrictions. This illustrates the ingenuity of entrepreneurs in continuing their business operations.”
Despite Poland’s current trade restrictions with Russia, the investor expects that trade with Poland will eventually resume. “Companies in Western Europe have completely ceased trading with Russia, just as Polish companies have,” Kahlfeld stated. “But they are highly ‘business-minded’ and pragmatic in their approach to stimulating economic activity, as was evident in the years before 2022, despite geopolitical considerations.”
Of all NATO countries, Poland allocates the highest percentage of its GDP to defence and is rapidly expanding its military. Although political ties have been severed, business connections remain intact, as demonstrated by trade with Russia, which has not completely ceased. For instance, Polish exports to Kyrgyzstan have increased eighteenfold during the war, presumably as a means to circumvent trade sanctions and indirectly continue commerce with Russia, according to Notes from Poland.
Polish exports to Kyrgyzstan have grown eighteenfold during the war.
The primary beneficiary in Poland of economic recovery following a peace agreement between Ukraine and Russia, according to Kahlfeld, will be the financial sector. “Polish banks will indirectly benefit from the recovery by providing loans and making investments in Polish companies that capitalise on Ukraine’s reconstruction.”
The bond between Ukrainian refugees and Poland
Poland, located in Central Europe, is wedged between two large neighbours: Germany and Ukraine. The declining economic activity in Germany, whose economy is struggling, could lead to a decrease in Polish exports to the west.
The east tells a different story. There, the main markets are relatively small, consisting of the Baltic states. However, Poland has a major trade partner in Ukraine, with a comparable population size of approximately 37 million. According to The Centre for Eastern Studies (OSW), Polish exports to Ukraine increased by 80 percent between 2021 and 2023. Additionally, many Ukrainian refugees have settled and found employment in Poland. “After the war, many of them will likely return to their homeland. This presents opportunities for the future,” Kahlfeld explained. “They have experienced the benefits of EU membership and will want to take full advantage of them.”
The closer ties forged during the war due to the influx of Ukrainian refugees into Poland could, in the long term, lead to strengthened economic cooperation and trade growth between the two countries, according to the portfolio manager.