Can you screen nations like stocks?

Should investors approach economies as if they were companies? Three big differences suggest not.

The first is accountability. While company directors answer to shareholders, regulators and customers, the managers of economies (usually governments) must tend to a much wider flock that includes workers, voters, public services, industry, and other nations.

The second concerns shape and size. While even very large companies tend to specialise in one or two subsets of a sector, economies are often far more diverse. The largest company in the world, Saudi Aramco (SA:2222), is both synonymous with the Saudi economy and its chief source of exports, but oil still makes up less than half of the country’s gross domestic product.

Third is the question of purpose. While companies seek to maximise shareholder value, economies are much more complicated and amorphous, and involve not only the funding of the arms of the state and control of money supply, but a limitless range of political and social projects.

On the other hand, lots of investors talk about countries and economic regions as though they were assets, made up of a series of key variables or factors, and with good reason. The historic success of the US stock market, for example, may owe much to a culture and legal system that prizes ingenuity and ruthless profit-seeking. But it is also inseparable from the story of the nation’s economy, the largest and most wealthy in history.

For many investors, this dynamic is the best reason to park a large chunk of capital in US equities, regardless of valuations or their mediocre current risk premium over bonds.

But how might this lens be applied elsewhere? One place to start is Europe. Like the US, its economies boast skilled workers, strong institutions, and great companies. And after a rough year for the continent’s economic outlook, things might be looking up: this week, official eurozone data showed Europe’s engine defied forecasts and grew in the last quarter of 2022.

Europe’s economy also has the virtue of being home to several nations whose economies can be compared side by side – just as you might screen stocks. Take this approach, and one country stands out for its comparatively low unemployment, low government borrowing, strong growth forecasts, median population age, and the cheapness of its public markets. That country is Poland.

There are, naturally, some big assumptions with this screening method. Lower government indebtedness is not in itself a reason to ‘buy’ an economy, nor are low corporate valuations (especially if, as in the case of Poland, interest rates and inflation are high). The screen’s criteria also omit some big metrics such as foreign direct investment – where exact comparisons and data are patchy – although Poland is, on one measure a more attractive destination than Italy or the Netherlands.

Nor should bullishness rest simply in data. Twenty years ago, as Poland joined the EU, Britain threw open the door to Polish workers in the hope that this industrious and cheap labour force would help to hold down inflation. In recent years, a combination of Brexit, wealth effects and better prospects back home have led many to head back. Surveys suggesting one in three Polish workers either plans to return or is mulling the prospect, is bad news for Britain and good for Poland’s economy.

Then there is geopolitics. Poland, which for years has been at loggerheads with Brussels on matters of judicial independence, has with the return of war ascended to the top table of EU and Nato decision-making. Having led the continent in its humanitarian and military support for Ukraine (and stance towards Russia), Warsaw has pulled the political and economic centre of gravity eastward.

Investors tempted to buy into this trend might then consider iShares MSCI Poland UCITS ETF (IPOL), which gives market-weighted exposure to a diverse array of listed Polish companies. It won’t be a perfect proxy for the Polish economy, of course, although its stock market is more representative than the FTSE 100’s collection of dollar-earning multinationals is to Britain. Nor will better growth rates map neatly to higher corporate profits. But under it all, there’s a sound investment case.