Greek Recovery Makes Stocks World’s Best as Paulson BuysNamitha Jagadeesh
Greek stocks, once shunned by investors concerned that a default would force the nation out of the euro, are beating almost every market in the world as a six-year recession eases and new investors consider purchases.
Since June 5, 2012, two weeks before MSCI Inc. gave notice it may reclassify Greece as an emerging market, the country’s ASE Index has surged 146 percent, trimming the decline from its 2007 peak to 79 percent. The gains topped all 94 national benchmarks globally in the period, except Venezuela, according to data compiled by Bloomberg. Yields on Greece’s 10-year government bonds have dropped to 8.31 percent from a peak of
33.7 percent in March 2012.
Paulson & Co. and JPMorgan Chase & Co. have bought shares as emerging-market funds including Renaissance Capital Holdings Ltd. and Templeton Emerging Markets Group expressed interest. JPMorgan’s Francesco Conte, who dumped Greek stocks from his European Small Cap Fund more than three years ago as the government’s budget deficit spiraled, has purchased stakes in retailer Jumbo SA and jewelry maker Folli Follie SA after the world’s biggest sovereign debt restructuring.
“The outlook for the country has completely changed,” Conte, who manages about $2.8 billion in London, said by phone on Oct. 24. “I’m very overweight Greece because I find very, very good opportunities, very well-run companies and very cheap valuations. Greece is only just emerging from the crisis. Because they’ve cut their cost bases so low, the profitability growth is going to be enormous if we get positive GDP growth.”
The Greek recession shows signs of easing after the Mediterranean country cut wages and pensions and increased taxes to meet targets linked to its two bailouts from the European Union and the International Monetary Fund. Prime Minister Antonis Samaras plans to trim the budget deficit to 2.4 percent next year, down from 9 percent in 2012 and a peak of 15.7 percent in 2009. The government forecast on Oct. 7 that gross domestic product will increase 0.6 percent next year, the first annual expansion since 2007.
Flows into equity funds investing in Greece rose 129 percent from the beginning of the year through Oct. 28, compared with a 15 percent gain for Europe as a whole, data from EPFR Global Inc. show. Investors have poured $179 million into Greek stocks this year, according to the data.
“Only nine months ago, global sentiment was, ‘I don’t want to touch anything Greek, not even Greek yogurt,’” Anthimos Thomopoulos, deputy chief executive officer of Piraeus Bank SA in Athens, said by phone yesterday. “Now investors don’t want to see anything but Greece. It’s a strange, idiosyncratic market, where you put money in a developed economy, albeit in distress, with emerging-market type of growth expectations with a strong currency.”
MSCI, whose equity gauges are tracked by investors with about $7 trillion in assets, confirmed it would switch Greece to an emerging market in June this year, having classified it as developed since 2001. The change, the first time the index provider had demoted a developed nation, will leave Greece as about 0.4 percent of the MSCI developing-country gauge, compared with 0.02 percent of the one it’s in now.
Emerging-market funds with a mandate to follow MSCI indexes will be allowed to invest in Greek stocks after the change takes effect following the close of trading on Nov. 26. Mark Mobius, who oversees $53 billion as executive chairman of Templeton, said he is looking at listed banks, retail, manufacturing and fashion companies.
“Despite Greece’s problems, we still see potential long-term opportunities,” Mobius said in e-mailed comments yesterday. “There is a realization that Greece is recovering, and, with continuing reforms, the growth could improve significantly.”
Bears say the stocks rally has already priced in Greece’s economic improvement. The 60-member ASE trades at 32 times its companies’ estimated earnings, compared with a five-year median of 11 times and 14.9 times projected profit for the Stoxx Europe 600 Index, according to data compiled by Bloomberg.
“Stocks have been moving up very strongly on the back of anticipation that things will improve in Greece,” William de Vijlder, who oversees $657 billion as Brussels-based chief investment officer at BNP Paribas SA, said by phone on Oct. 24. “The market is trading at a premium on a price-to-earnings basis that is quite significant.”
The nation faces political disputes that may derail its recovery, with debt forecast to peak at 176 percent of GDP this year. Samaras’s government, with a majority of just five in the 300-seat parliament, must approve a budget by the end of the year. In a Marc SA survey of voters between Oct. 1 and Oct. 7, the prime minister’s New Democracy party won 22.7 percent approval, while the main opposition Syriza party, which opposes the terms of Greece’s bailout, got 22.5 percent.
For Kevin Gardiner at Barclays Plc, the risks mean investors can find better opportunities in Italy or Spain.
“Greece is such a small, volatile market that it wouldn’t be appropriate for us to single it out to our clients,” Gardiner, head of investment strategy at Barclays’s wealth-management unit, which oversees $326 billion, said by phone on Oct. 23. “On a risk-adjusted basis, there are better positions elsewhere in the rest of the periphery.”
The Greek recession has destroyed almost a quarter of its economic output and sent unemployment surging to a record 27.6 percent. The ASE lost 91 percent from October 2007 through the 22-year low reached in June 2012. The benchmark gauge rose 1.3 percent to 1,188.17 points at the close of trading in Athens today, compared with its peak of 5,534.5 in October 2007.
After Coca-Cola HBC AG, the world’s second-biggest bottler of the soft drink, switched its primary listing to London from Athens in April, Greek equities have a market value of $83 billion, less than Kuwait with $107 billion and Qatar with $145 billion, data compiled by Bloomberg show. The country’s weighting in the MSCI World compares with 52 percent for U.S. companies and 9.2 percent for Japanese stocks.
After the downgrade, the nation will have a weighting of as much as 0.4 percent of the MSCI Emerging Markets Index, according to Deutsche Bank AG. The reclassification may allow Greek stocks that couldn’t meet the size or liquidity requirements to join MSCI’s measure for developed equities and benefit from inclusion in the “MSCI universe,” Priyal Mulji, a strategist at Deutsche Bank in London, wrote in a report yesterday.
“Greece is going to be very interesting for our emerging-market clients,” Benjamin Samuels, global head of equity sales at RenCap, said in an Oct. 24 interview in Moscow. “Already we have two or three client trips to Greece lined up to help our clients get to know the market. That’s very exciting as a brand new market for us.”
Becoming a bigger section of the investment pool may help Greek shares, in a reverse of the way MSCI’s upgrade of Israel might have harmed that market.
Investors withdrew $795 million from Israel in 2010, when it was raised to developed status. Israel’s TA-25 Index has gained 16 percent since the promotion from developing economy in May that year, trailing the 53 percent advance in the MSCI World. Trading volume tumbled 44 percent through the end of 2012 compared with an average 18 percent global decline, the Bank of Israel said. Israeli shares now comprise 0.19 percent of the MSCI World, having previously formed 2.7 percent of the emerging-market gauge, Bloomberg data show.
While emerging-market fund managers await the final implementation of MSCI’s downgrade, hedge funds including billionaire John Paulson’s Paulson & Co. and Dan Loeb’s Third Point LLC have already bought into Greece.
Paulson, known for making $15 billion for his investors in 2007 by betting against subprime mortgages before the U.S. housing collapse, bought shares in Alpha Bank SA in the third quarter as part of the lender’s recapitalization, a report to clients this month showed. His firm, which manages $18 billion, also bought warrants to purchase 7.41 additional shares for each common share.
The purchase will “produce high returns if, as we anticipate, the Greek economy normalizes and the banks return to profitability,” Paulson & Co. said in the report. Armel Leslie, a spokesman for the fund at WalekPeppercomm, declined to comment further when contacted by Bloomberg News.
Third Point said in April it would start a Greece-focused hedge fund, while Fairfax Financial Holdings Ltd., a conglomerate with investments from Canadian cattle feed to Irish banks, bought shares in two Greek companies this year. It paid about 164 million euros ($226 million) to raise its stake in Eurobank Properties Real Estate Investment Co. to 42 percent from 19 percent. It also increased its holding in Athens-based energy producer Mytilineos Holdings SA to 5.2 percent, according to an Oct. 21 release.
“We continue to support Greece,” Fairfax Chief Executive Officer Prem Watsa said in the statement. “The country continues to make great strides towards addressing the key areas of its economy, thus encouraging foreign investment and creating a positive momentum that will foster increased employment and infrastructure development.”
Watsa and Elissa Doyle, a managing director at Third Point, declined to comment further when contacted by Bloomberg News for this story.
As an emerging market, Greece will be grouped with Europe’s other developing economies, such as the Czech Republic and Hungary. MSCI already classifies euro-area members Estonia and Slovenia as emerging.
“There are plenty of emerging-market investors who haven’t looked at Greece for 12 years, and there’s clearly an economic recovery in the country,” Matthew Beesley, who helps oversee about $100 billion as head of equities at Henderson Global Investors Holdings Ltd. in London, said by phone on Oct. 29. “Greece is a very welcome addition to the benchmarks of emerging markets in eastern Europe.”
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