JPMorgan Says Greece's World-Beating Rally Has Little Left to Go

What’s Blocking an EU Deal on Greek Debt Aid?
  • After being world's biggest losers, Greek stocks surge most
  • Economy forecast to contract; earnings to stay `soft': JPM

For those who haven’t benefited from the rebound that’s making Greek stocks this year’s best bet among western-European markets, it might be too late to join in.

JPMorgan Chase & Co.’s Emmanuel Cau says that while an agreement on debt relief is likely, the economic reality will soon rein in the exuberance that lifted the ASE Index 42 percent in three months. The stance is at odds with Morgan Stanley, which last week recommended shares of the country’s lenders following other bullish calls by HSBC Holdings Plc and Credit Suisse Group AG in March.

“There could be a short-term support to equity markets if there is a deal, but we don’t think there’s much more in terms of potential increases to be repriced,” said Cau, a strategist based in London, who doesn’t have a recommendation on Greek stocks. “Can the Greek market go higher from here? Yes because it was depressed, but earnings will be quite soft in the foreseeable future.”

Greece and its creditors are back at the negotiating table, and euro-area finance ministers presented the first-ever plans for a debt relief on Monday. While the optimism has helped Greek stocks rebound from their lowest levels since 1989 and its bonds become the world’s best-performing sovereign securities over the past month, the forecasts remain dire for the nation’s economy, projected to contract 0.7 percent this year.

Since former Prime Minister Antonis Samaras called for presidential elections at the end of 2014, Greece has been through three votes and came to a standstill as capital controls were put in place and its stock exchange was shut for five weeks. Its equity market plunged more than 23 percent in each of the past two years and by February had tumbled 30 percent -- becoming the world’s biggest equity loser -- before staging the best rally of the 93 markets tracked by Bloomberg. As of Tuesday, the ASE had almost erased all of its annual losses, while the Stoxx Europe 600 Index was down 8.1 percent.

Following last Monday’s meeting, finance chiefs are scheduled to reconvene in two weeks to finalize negotiations. Debt relief could include maturity extensions or interest reductions, International Monetary Fund Managing Director Christine Lagarde said last month.

In its May 4 note, Morgan Stanley raised its ratings on Alpha Bank AE, National Bank of Greece SA, Eurobank Ergasias SA and Piraeus Bank SA to the equivalent of buys, saying they might jump about 90 percent as they keep cutting costs and deposits slowly come back.

“We expect to see swiftly improving fundamentals for both the economy and banking sector -- thus an attractive entry point,” analysts including Daniele Antonucci and Robert Tancsa wrote. They estimate the ongoing review will lead to debt relief, the lifting of capital controls and eventually an economic recovery.

On average, analysts project Alpha Bank, Eurobank Ergasias and Piraeus Bank will rally at least 24 percent in the next year. And it’s not just lenders -- Hellenic Telecommunications Organization SA, one of the country’s biggest companies, has the most buy ratings since 2002.

Seven Investment Management co-founder Justin Urquhart Stewart, who turned overweight on Greek stocks in the second half of last year, echoes JPMorgan in saying that the rally is running out of steam.

“Stocks are going to find it more difficult to make headway now because a lot of the good news have already been told,” he said. His firm oversees about $14 billion. “Once there is an agreement, you’ll see a slight jump but otherwise you’re probably seeing the best of the recovery for the time being. It will be a good opportunity to cash in.”

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