(FROM BARRON'S 11/10/14)

Poland is an easy country for investors to like. The most populous by far of the ex-Soviet satellites, it has admirably anchored Eastern Europe's smooth transition to freedom and relative prosperity. Poland's gross domestic product has grown sixfold since 1990. Sticking to balanced budgets and conservative consumer lending, it was the only state in the European Union to avoid recession after 2008. Following a lackluster 2012-2013, growth is accelerating again to near 3% this year, positively tigerish by European standards. "Poles work hard, save a lot, and move forward cautiously but steadily," summarizes Timothy Ash, head of emerging market research at Standard Bank in London.

But anyone hoping for a killing in Polish stocks lately has been disappointed. The Warsaw Stock Exchange's benchmark WIG20 index is worth no more than it was three years ago. Equities in the much-maligned euro zone have gained 35% over that period, as measured by the Euro Stoxx 50 index, while the Standard & Poor's 500 has risen by more than 50%.

The WIG's underperformance holds a lesson for emerging markets investing: Markets do not always mirror the broader economic performance analysts focus on. One big factor restraining Polish stocks has been pension reform earlier this year that went little noticed outside the country. Until February, 2.8% of Poles' salaries was reserved for private pension funds, which invested much of that money in the local stock market. Now, only workers who choose the private system make contributions. Most have let their funds be diverted to the traditional state system, which is fixed-income oriented. Meanwhile the government allowed the private funds to invest 30% of their assets abroad, up from 5%. All that has sucked 10 billion zloty ($2.9 billion) out of Polish equities, estimates Petter Attard Montalto, chief economist for emerging Europe at Nomura in London.

Another drag is the WIG20's makeup, says Piotr Bujak, chief economist at PKO Bank Polski in Warsaw. Three big financial firms -- his own (ticker PKO.Poland), rival Bank Pekao (PSE.Poland) and insurer PZU (PZU.Poland) --account for 40% of the index. They are victims of their own stability valuation-wise, priced at hefty premiums to both emerging market and European peers. PKO trades at a trailing P/E ratio of nearly 18. That compares with 8.7 for Brazilian blue-chip Itau Unibanco Holding (ITSA3.Brazil) and 4.5 for Sberbank (SBER.Russia), Russia's biggest. In Western Europe, Deutsche Bank (DBK.Germany) is at 13 times trailing earnings, BNP Paribas (BNP.France) at 10.2.

Healthy as Poland's economy is, it is not expanding fast enough to justify any further run-up for its banks. Another 30% of the WIG20 is allocated to raw-materials producers led by copper miner KGHM (KGH.Poland) and oil company PKN Orlen (PKN.Poland)-- both exposed to the worldwide commodities slump.

On the bright side, Poland is probably not as affected by the meltdown in Russia and Ukraine as investors might assume. Just 8% of exports go to the former Soviet Union, against 50% to the euro zone. The political weather also looks sunnier. The ruling Civic Platform party, which has guided the country capably since 2007, looked to face a stiff electoral challenge next year from the opposition party. But an internal shuffle--Ewa Kopacz took over as prime minister on Aug. 30 when her mentor Donald Tusk assumed the presidency of the European Council -- seems to have revived Civic Platform's flagging popularity.

But the electoral drama may prove less important than gritty details of regulation and index weighting that seldom make headlines. One more reason for investors to have a good look under the hood before throwing money across the world.

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Craig Mellow is a free-lance writer who covers emerging markets.