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Greek Rally Derailed as Austerity Undermines Valuations

A visitor passes a red stock index curve displayed on an electronic screen at the Hellenic stock exchange in Athens, Greece. Photographer: Chris Ratcliffe/Bloomberg
A visitor passes a red stock index curve displayed on an electronic screen at the Hellenic stock exchange in Athens, Greece. Photographer: Chris Ratcliffe/Bloomberg

The four-month rally in Greek shares that turned the ASE Index into the most expensive national benchmark in western Europe is ending as lawmakers squabble over austerity measures needed to ensure the flow of bailout funds.

Greek stocks tumbled 8.3 percent last week, the biggest decline in five months. The ASE had surged 88 percent from a two-decade low on June 5 through Oct. 22 as Public Power Corp. and Eurobank Ergasias SA more than tripled, pushing the gauge’s valuation to 51 times estimated 2012 earnings, data compiled by Bloomberg show. That was the highest on record and compares with the five-year average of 11.7 times projected profit.

Politicians in Greece’s coalition government are debating debt-reduction measures demanded by the European Union as the nation completes its fifth year of recession. Inspectors from the so-called troika of the European Central Bank, the International Monetary Fund and the EU are negotiating with the government over budget cuts and economic reforms, before a Nov. 12 decision on whether Greece will win a bailout that allows it to stay in the euro.

“Greece’s political problems have come back, and that’s what drives the market,” Gerard Lane, a strategist at Shore Capital Group Ltd., an investment bank and stockbroker in Liverpool, England, said by phone. “The economy shows limited sign of healing, if any, and the desire for austerity seems to be lacking.”

Market Capitalization

Greece’s market capitalization is 87 percent below the record $273 billion reached in November 2007 as surging borrowing costs forced the government to accept two EU-led bailouts. Greece sought a 110 billion-euro ($141 billion) rescue package in May 2010. Finance ministers from the 17 nations that share the euro approved a second round of assistance, worth 130 billion euros, in March 2012.

Stocks surged to a 13-month high on Oct. 22 as ECB policy makers approved an unlimited bond-buying program to control borrowing costs in the region’s weakest economies. The gains are unraveling as Prime Minister Antonis Samaras’s bid to placate creditors with 13.5 billion euros of austerity measures runs into opposition from members of his coalition. The ASE rose 3.4 percent to 829.07 at the close in Athens today.

Samaras’s New Democracy is reliant on lawmakers from the socialist Pasok party and the Democratic Left to pass labor reforms and other changes before the troika will release the next 31.5 billion euros of aid. A law on state asset sales scraped through Parliament on Oct. 31, with 148 votes in favor and 139 against, raising concern Samaras’s coalition may not have enough support to pass the austerity package.

Bailout Funds

Greek lawmakers are likely to hold a ballot on the measures this week, before a meeting of euro-area finance ministers on Nov. 12. Pasok lawmaker Michalis Kassis said last week he will sit as an independent and vote against the austerity plan.

“The vote coming up on a 13.5 billion-euro package of austerity and reform measures is key,” said Manish Singh, who helps manage $2 billion as head of investment at Crossbridge Capital in London. “The question is: will the coalition manage to get support for it? If it doesn’t, further assistance from the troika can be in jeopardy.”

Greece’s economy will shrink 6.6 percent this year, with further contractions in 2013 and 2014, economists’ forecasts compiled by Bloomberg show. The jobless rate has climbed to more than 25 percent as politicians push through cuts to benefits, wages and pensions. The government projects debt will peak at 192 percent of gross domestic product in 2014.

‘Greater Risks’

The situation in Greece is currently the biggest challenge to the euro area, Alex White, an economist at JPMorgan Chase & Co. in London, wrote in a report. “We think it has the numbers on current projections, but risks remain.”

Stocks in Greece are too cheap to pass up, according to Nektarios Papagiannakopoulos, senior research analyst at Dromeus Capital Management SA in Athens, which manages $130 million.

“Greek capital market valuations offer outstanding risk-reward opportunities,” Papagiannakopoulos said. “Current valuations for the names on our radar continue to discount severe macro- or micro-developments.”

Dromeus buys shares in companies “that stand out on management-crisis response, business models allowing strong cash generation and balance sheet quality with fully funded operations,” while avoiding those with retail-consumption exposure, he said. He did not name individual stocks.

Individual Investors

Individual Greek investors accounted for 40 percent of trading in the nation’s stocks during September, the highest level since at least 2007, Athens Exchange Chairman Socrates Lazaridis said on Oct. 10. That’s a 10 percentage point increase from last year, data provided by Hellenic Exchanges SA as of Sept. 28 showed.

The ASE traded at a record premium to analysts’ forecasts last month, according to Bloomberg data going back to July 2010. The gauge was 16 percent above the average level of brokers’ share-price estimates for individual companies, the data show. Every other market in western Europe traded at a discount.

Companies in the ASE will earn 17.65 euros a share in 2012, according to analysts’ projections compiled by Bloomberg. That’s down from an average forecast for profit of 82 euros at the start of the year.

Listing Switch

While Public Power Corp., Greece’s biggest electricity producer, and Eurobank, an Athens-based lender, have rallied since June, Coca-Cola Hellenic Bottling Co. SA, the country’s largest company by market value, plans to switch its main stock listing from Athens to London next year. The move will make the world’s second-biggest Coca-Cola bottler eligible for inclusion in the benchmark FTSE 100 Index.

The yield on Greece’s benchmark 10-year bond rose three basis points to 18.19 percent on Nov. 2, widening the spread to similar-maturity German bunds to 16.74 percentage points.

While the ECB’s bond-buying plan has calmed fears of a euro-zone breakup, it has not restored international investors’ confidence in Greek equities, according to Kevin Gardiner of Barclays Plc.

“Even with the ECB’s actions, investing in Greek stocks is one risk too far,” said Gardiner, head of investment strategy for Europe, Middle East and Africa at Barclays Wealth & Investment Management in London. “We are not recommending it to our investors.”

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