Greek Lightning Strikes

Much ink has been spilled over Greece’s financial woes.   And if you’ve followed the headlines, you might think Greek lightning was burning Athens to the ground.  While it’s true that Greece’s finances have been woefully mismanaged (it has the second highest Debt/GDP ratio in the world), in absolute terms things may not be as bad as they seem.

Greek’s debt burden is somewhere around $400 billion.  Yes, that’s a lot, but it’s relatively small potatoes compared to the trillions in debt carried by countries like the US and Japan.  And of course, if push came to shove, Germany could write a giant Euro check to square Greece’s problems — but who could do that for the US or Japan?

The truth is nobody wants Greece to fail.  Not the ECB, not the IMF, not the Euro Zone, and certainly not the EU — which is still reeling from Brexit.  Despite the much hostile debate, Europe has inflated one bailout buoy after another to keep Greece afloat, showing with action rather than words that it simply will not let Greece go under.

Meanwhile, the market has been hating Greece for so long nobody seems to care conditions may actually be improving. For example, despite languishing in recession for the past six years, the worst may actually be behind Greece.  On the margin, Greek growth has been steadily doing “less bad” year over year.  And as Greece makes progress with its debt negotiations, prospects are likely to continue improving.

The same trend can be seen in capital flows.  Following a tremendous flight of outflows, capital is slowly seeping back into Greece, admittedly in a choppy fashion.

But of course, everybody still hates Greece.  That much is clear just by looking at pricing for the Greek equity market.  Greek stocks trade at deep discounts relative to major equity indices (represented by the respective ETFs below).

Source: SP Capital IQ, Morningstar, BCM

I’ve had an eye on Greece since 2011, but it wasn’t until recently that valuations fell low enough to really grab my attention.  Is the discount justified?   Maybe. Is the worst over?  Maybe not. Honestly, I don’t know the answers to those questions.  What I do know is it’s highly unlikely the entire Greek equity market will continue trading for less than 5 times earnings and under 0.5 times book value indefinitely.  Timing is always uncertain,  but a rebound could happen sooner than expected if conditions continue to improve.

Keep in mind I’m not implying Greece needs to stage a miraculous comeback or displace China as the global engine of growth.  All it needs to do is perform less badly than expected.  As of now, pessimism is so pervasive and expectations are so low that it won’t take much for Greece to surprise to the upside.

The risks are obvious but should not be overlooked.  Greece’s finances are clearly a mess and that will continue to be a drag on the economy and sentiment. Whether or not Greece can wrestle favorable terms moving forward will obviously impact its prospects.   Geopolitical risks are also a real concern, with respect to both Greece’s internal factions and its relationship with Europe.  If Greece were to exit the EU or the Euro Zone, Greek lightning could very well strike again!

I don’t know if Greek stocks have found a bottom or not, but I think chances are good that a patient, long position at current prices or better will be rewarding over time.  If you take a position, do so slowly and build it incrementally over time on price weakness.  And of course, as with any high-risk value play like this, don’t bite off more than you can chew (i.e. afford to lose).

Victor K. Lai, CFA

This blog is for informational purposes only. Nothing on this blog represents advice. Investing is inherently risky and involves the potential for loss.  Victor Lai is long GREK.

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