GREK - GREK: The Greek Turnaround Takes Shape As A Near-Term Catalyst Looms

2023-04-03 09:54:32 ET

Summary

• The Global X MSCI Greece ETF offers investors low-cost exposure to the Greek turnaround story.
• With inflationary pressures retreating and the post-COVID tourism recovery in full swing, the Greek economic growth trajectory remains intact.
• Supported by an improved fiscal profile, Greece looks poised for a near-term sovereign rating upgrade.

Following the post-COVID reopening, Greece's domestic macro fundamentals appear as strong as ever and should continue to benefit from a rebound in tourism receipts and positive private credit growth. While external weakness is a concern amid the rising cost of debt throughout the Eurozone, Greece's encouraging fiscal discipline has already driven its debt-to-GDP lower, allowing for secular domestic demand to underpin its economic recovery. Even after the double-digit percentage rally in the back half of last year, equity valuations screen attractively, particularly for the banks, a key overweight for the Global X MSCI Greece ETF ( GREK ). And with the improved Greek economy also poised for a sovereign rating upgrade at the upcoming review, there is a clear re-rating catalyst on the horizon.

Fund Overview - Low-Cost Exposure to a Concentrated Portfolio of Greek Equities

The US-listed Global X MSCI Greece ETF seeks to track, before expenses, the yield and price performance of the MSCI All Greece Select 25/50 Index, comprising a select group of at least 15 constituents of the Greek equity universe. The ETF held ~$154m of net assets at the time of writing and charged a 0.6% expense ratio, making it a cost-effective option for US investors looking to access Greek equities. A summary of key facts about the ETF is listed in the graphic below:

The fund is spread across 26 holdings, with Financials making up the largest sector allocation at 33.6%, followed by Industrials at 15.2% and Consumer Discretionary at 15.1%. On a cumulative basis, the top five sectors accounted for ~84% of the total portfolio, making GREK one of the more top-heavy single-country Euro area ETFs. While the fund's equity beta stands at 1.31 to the MSCI EAFE ( EFA ), a proxy for developed markets ex-North America, GREK is considerably less cyclical than most global emerging market exposures with a beta of 0.93 to the MSCI Emerging Markets ( EEM ).

The single-stock allocation of GREK reflects its financials-focused sector allocation, with the fund's largest holding being Greek banking leader Eurobank Ergasias ( OTCPK:EGFEY ), at 10.4% of net assets. Other key holdings include state-owned gaming company OPAP SA ( OTCPK:GOFPY ) at 9.7% and Hellenic Telecommunications ( OTCPK:HLTOF ) at 8.6% of the portfolio. The rest of the top five comprises more financials, with Greek banking groups Alpha Services ( OTCPK:ALBKF ) contributing 8.2% and the National Bank of Greece ( OTCPK:NBGIF ) at 7.1%. In total, the five largest holdings add up to ~44% of the overall portfolio, making GREK a relatively concentrated Euro area ETF. Reflecting the fund's concentration on Greek banking, a sector with a checkered past, the underlying portfolio trades well below book value at 0.8x, screening cheaply relative to the portfolio's >10% return on equity.

Fund Performance – Steady Yield but Sub-Par Capital Growth

On a YTD basis, the ETF has appreciated by 13.2%, but has declined at an annualized -3.0% rate in market price and NAV terms since its inception in 2011. Given the cyclical nature of the Greek economy and its financial troubles over the last decade, performance has been volatile - last year saw a low-single-digit percentage gain on the back of a tourism rebound post-reopening, but zooming out, GREK remains a long way off pre-bailout highs. On a three, five, and ten-year basis, the ETF has annualized at -1.9%, -0.3%, and -4.8%, respectively.

The semi-annual distribution comes entirely from income, with the fund's holdings in high-dividend banking stocks underpinning much of the capital return. At a trailing yield of 2.2%, GREK yields a decent income stream, which has generally sustained through the cycles. While the fund's distribution declined through the COVID-impacted years in line with earnings, the 2022 peak of $0.75/share indicates growth is back on track.

Recovering Economy with a Sovereign Upgrade Catalyst

With Greek headline inflation continuing to decelerate rapidly this year, the economy looks poised for a good outcome at the upcoming sovereign rating review. The turnaround in the Greek economy contrasts with most of last year, when inflation had accelerated to a >12% peak, weighing on overall consumption. While 'sticky' Euro area core inflation could lengthen the ECB's tightening runway, the post-COVID recovery in Greek employment and tourism receipts is in full swing and bodes well for the country's economic resilience ahead of more hikes. Also encouraging is that growth in credit to the broader economy has accelerated through the ECB rate hike cycle, while continued support from the Recovery Fund (currently at a high-teens percentage of GDP) through 2026 provides additional cushion.

In contrast with prior years, when Greek debt had been a weak link relative to the rest of the Euro area, higher yields and sovereign debt costs will likely have less of an impact this time around. For one, the country's debt profile features a weighted average maturity of >17 years, shielding it from short-term spikes in funding costs. And more importantly, the strong GDP growth at +5.9% in 2022 is boosting the country's fiscal outlook. Alongside the government's fiscal discipline, a return to a surplus position looks to be on the cards. Hence, a sovereign rating upgrade seems likely. The key risk here is the election this year and the lack of a clear majority – for now, a Nea Dimokratia-led coalition seems the most likely outcome, pointing toward a status quo scenario.

The Greek Turnaround Takes Shape as a Near-Term Catalyst Looms

Against the inflationary pressures throughout the Euro area, Greece's improved domestic economic fundamentals stand out. Bright spots include private credit growth and a resulting pick-up in capital formation despite a rising cost of debt backdrop. Also positive is the government's fiscal discipline thus far, which alongside the domestic demand recovery, has led debt-to-GDP on a declining path. Net, the setup heading into the next sovereign rating review looks compelling, and an upgrade could well be on the cards. While equities have rallied in recent months on expectations of a tourism boost post-reopening, equity valuations remain attractive. In particular, the banking sector, the GREK ETF's largest sector allocation, continues to trade well below book value despite generating solid ROEs and remaining poised to benefit from more ECB rate hikes. Barring any adverse election outcomes this year, Greece equities appear attractive here.

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