GREK - GREK: In Fine Fettle As Greece Rebounds

2023-08-31 13:08:26 ET

Summary

• The Global X MSCI Greece ETF is the only diversified option for exposure to liquid stocks from Greece, covering around 26 stocks with a weighted average market-cap of $4bn.
• The macroeconomic backdrop of Greece is positive, with relatively solid GDP growth, a thriving tourism sector, and a healthy labor market.
• The ruling government's stability and commitment to reforms and investment growth, along with better fiscal prudence, are expected to contribute to the country's economic improvement.
• GREK's heightened exposure to Greek banks is also a plus as they could pay dividends for the first time in 14 years in 2024.
• Valuations look cheap, and there's scope for further mean-reversion, but we would advise investors to wait for a pullback.

Introduction

The Global X MSCI Greece ETF (GREK) is a $200m sized financial product that currently serves as the only diversified option for those seeking exposure to liquid stocks (each individual stock is required to maintain an average daily liquidity value of at least $25m) from Greece. These stocks should either be listed or headquartered in that country and should have the majority of their operations carried out from there. GREK seeks to offer coverage to at least 15 Greek stocks, but currently, it covers around 26 stocks. The overall feeling here is that you're looking at a small to mid-cap-type portfolio, with a weighted average market-cap of $4bn.

Macro Commentary

After exploring the macroeconomic backdrop of Greece, we have to say that we're feeling rather sanguine about the economy's prospects. In Q1, Greek GDP growth came in at 2.1% , better than the 1.1% rate seen in the Eurozone, and it looks like the country will close the year on a much superior note. The OECD expects FY23 GDP growth to come in at 2.2% , comfortably ahead of the 0.9% forecast for the Euro area. Behind the resilient GDP backdrop, you have a number of encouraging subplots.

Firstly, tourism which accounts for 18-20% of the Greek economy is in a good way and looks on course to contribute EUR39.2b n this year, hardly a breath away from the 2019 highs of EUR40.8bn. Crucially, after only creating 5,000 tourism-related jobs last year, this year will witness an exponential jump to 17,000 jobs, which should put it on par with the 2019 peak.

Speaking of jobs, it's also very heartening to note that the unemployment demons of the past appear to be receding. Roughly 10 years ago, unemployment rates in Greece used to hover around the 27% mark, but these days it is only half that level.

Consumer spending conditions could also pick up as the wage narrative continues to improve; last year the country had raised the minimum wage twice and this year in April yet another 9.4% hike was brought through. With a benevolent ruling government of this sort, elections proved to be something of a no-contest with the New Democratic party winning 40% of the parliamentary elections in June, and giving Kyriakos Mitsotakis another four years at the helm. Political stability at the very top can be very conducive for equity market outperformance.

The ruling government will also be emboldened to carry out reforms and stimulate investment growth, and that's what you're likely to see in the years ahead. According to the OECD, fresh public investment projects could account for 1% of GDP in FY23 and a higher margin of 1.7% of GDP in FY24. Private investment projects too will contribute 0.8% of GDP.

Investors should recognize that even though the spending is expected to pick up and will be funded by substantial debt, the overall fiscal position is in a much better state. This was an economy whose public debt to GDP was well over 210% a few years back; over the last few years it has trended lower and will likely to drop to less than 150% by 2027.

Better fiscal prudence has also resulted in much lower costs of insuring Greek debt, a marked deviation from the dynamics in Turkey.

What will also help GREK is it heightened exposure to Greek banks (one-third of the portfolio comes from this segment alone) who will likely serve as key agents in the burgeoning capital formation landscape there. Already in Q2, three out of the top five performing banks in Europe, were Greek-based banks, giving you a sense of the optimism floating around this sector. We think interest for this sector could remain elevated, as the Greek banks are poised to pay out dividends next year for the first time in 14 years!

Closing Thoughts - Technicals And Valuations

This year, Greek stocks have proven to be one of the high-flying equity pockets across the globe. Admittedly, global stocks (as mirrored by the Vanguard Total World Stock ETF) haven't done too badly this year, delivering 14% returns on a YTD basis, but GREK comfortably trounces that performance, providing a return profile that is 3x higher!

Interestingly enough, despite the strong outperformance this year, Greek stocks still look like one of the more oversold pockets in the world, with scope for further mean-reversion. This is exemplified in the image below, which juxtaposes how GREK is positioned relative to VT over the last decade. Note that the current relative strength ratio is still only half as much as where the mid-point currently is.

This mean-reversion theme could potentially still have legs as GREK's valuations look very tasty compared to not just the globe, but Europe as well. According to Morningstar data, GREK's portfolio is currently priced at only 8x P/E. That's a mammoth 52% discount to the corresponding multiple of VT, and 38% cheaper than the corresponding multiple of the iShares MSCI Core Europe ETF. Crucially, at that discounted multiple, GREK also offers the prospects of slightly better long-term earnings growth.

Whilst the long-term conditions look alluring, we also want to switch over to the standalone monthly chart to ascertain the intermediate conditions for a suitable entry. Well, on that front, it's fair to say that an entry at the current juncture wouldn't be too ideal.

Firstly, note that the ETF has been trending up in the shape of a very strong ascending channel for close to a year. The relative steepness of this channel makes us feel that the ETF could witness a pullback or flattening of the price action, particularly as it has now hit a point where we saw some flattening out in 2015.

Also note that after months of positive fund flows, GREK has, in recent weeks, witnessed some outflows, as the ETF gets close to the resistance zone. To close, we would advise investors to wait for a pullback before contemplating a long position in GREK.

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