2023-06-20 16:35:06 ET
Summary
- The Global X MSCI Greece ETF has outperformed the rest of the Euro area this year.
- With more catalysts on the horizon, the rally still has legs.
- At the current discount to book, the bank-heavy GREK ETF offers compelling re-rating potential.
Since I last covered the Global X MSCI Greece ETF ( GREK ), the fund has outperformed its developed and emerging European peers by a wide margin, supported by a slew of positive earnings revisions. With the resounding election win for incumbent party Nea Demokratia (40.8% of the vote vs. Syriza at 20.1%) also removing a great deal of political uncertainty, the path to further EPS upgrades for Greek large-caps seems clear into 2024. While the tourism-led recovery is well understood by now, there remain multiple upside catalysts on the horizon, including a potential sovereign rating upgrade later this year and the reinstatement of bank dividends next year. At a P/Book valuation of less than 1x, the bank-heavy GREK portfolio remains cheap, particularly against its recovering RoE profile (currently at ~12%) and the prospect of structurally lower funding costs post rating upgrades.
Fund Overview - Low-Cost but Concentrated Exposure to the Greek Turnaround
The US-listed Global X MSCI Greece ETF tracks, before fees and expenses, the total return (i.e., the yield and price performance) of the MSCI All Greece Select 25/50 Index, a select group of over 15 Greek large-cap names subject to liquidity constraints. The ETF held ~$187m of net assets at the time of writing, a significant increase from the ~$154m prior, supported by the underlying equity outperformance and investor inflows in recent months. At a 0.6% expense ratio (unchanged), GREK screens reasonably on a cost basis relative to comparable emerging market funds. A summary of key facts about the ETF is listed in the graphic below:
The fund has added one holding since last reporting, though the 27-stock portfolio remains relatively small. The portfolio composition is also broadly unchanged - Financials remain as the largest sector allocation, albeit at a smaller 31.9% (down over 2%), followed by Industrials at 18.7% (up over 3%) and Consumer Discretionary at 13.8% (down over 1%). With the top five sectors accounting for ~85% of the total portfolio, GREK remains one of the more concentrated single-country Euro area ETFs. The fund's equity beta has declined, however, to 1.16 to the MSCI EAFE ( EFA ), a proxy for developed markets ex-North America, helped by its financials-heavy portfolio. At a standard deviation of 28.3% and an equity beta of 0.77 relative to the MSCI Emerging Markets ( EEM ) as well, GREK's risk profile stands out favorably relative to comparable emerging market ETFs.
In line with its financials-focused sector allocation, GREK's single-stock portfolio is dominated by the largest Greek banks. At the top of the list is the fund's largest bank holding, Eurobank Ergasias ( OTCPK:EGFEY ), at 10.9% (up ~50bps) of net assets, followed by the National Bank of Greece ( OTCPK:NBGIF ) at 8.0% (up ~90bps) and Alpha Services ( OTCPK:ALBKF ) at 5.1% (down over 3%). The major ETF addition is industrial conglomerate Mytilineos SA at 8.5%, which increases the fund's ex-financials diversification, along with other key holdings like state-owned gaming company OPAP SA ( OTCPK:GOFPY ) at 8.0% and Hellenic Telecommunications ( OTCPK:HLTOF ) at 7.9%. In total, the five largest holdings contribute an outsized ~43% of the overall portfolio, so GREK investors will need to be comfortable with the concentration. That said, the underlying portfolio still trades below book value at <1x (re-rating from the 0.8x prior), screening very reasonably relative to the portfolio's increased 12% return on equity.
Fund Performance – YTD Appreciation Defies Underwhelming Track Record
On a YTD basis, the ETF has appreciated by 37.6% but has declined at an annualized -1.8% rate in market price and NAV terms since its inception in 2011. A key contributor to the historic underperformance has been the financial troubles faced by the Greek economy over the last decade, followed by the outsized COVID impact - a consequence of its dependence on the services sector. While performance has been volatile on the downside, this has also been true on the upside - last year, for instance, saw a low-single-digits percentage gain on hopes of a tourism rebound post-reopening, with further economic strength this year underpinning a further rally. Zooming out, though, GREK remains far off pre-bailout highs - on a five and ten-year basis, the ETF has annualized at 3.6% and -2.0%, respectively.
In contrast with the volatility of its returns, the fund's income distribution has been relatively consistent through the cycles. The fund's cash-generative stock holdings are a key contributor, driving the trailing yield consistently over 2%. With the Greek economy on the mend and the major banks also committing to higher payouts, expect further upside to last year's $0.75/share distribution going forward.
Sovereign Rating Upgrade Leads a Wave of Post-Election Catalysts
After a challenging decade, the Greek economy, under the stewardship of ND's Mitsotakis, appears to be finally turning a corner. Structurally, the country isn't entirely out of the woods – its dependence on cyclical services demand, mainly tourism, means the economy is highly levered to volatile global demand trends. But reforms are underway, helped by the EU-funded 'recovery and resilience plan' (EUR30.5bn of grants and loans or ~17% of GDP ) to be deployed through 2026. The resounding 'round one' win for incumbent center-right party ND and its strong lead in the polls ahead of the snap parliamentary election later this month also removes a key political overhang.
Policy continuity and a continued tourism-led rebound in Greek growth are key to further de-levering – ND has already delivered a 23% decline in the country's debt/GDP to ~171% in 2022 and remains on track to bring debt levels even lower to ~135% of GDP by 2026. Success here would, in turn, strengthen the case for a Greek sovereign upgrade at the next round of rating reviews (likely in September). Along with the equity valuation benefit of a lower cost of capital, an upgrade of Greek Government Bonds to 'investment grade' will pave the way for second-order corporate debt upgrades; having cleaned up their balance sheets following the last debt crisis, Greek banks are in a good position to benefit.
Lower funding costs also bode well for Greek banks' plans to reinstate their dividends. All four of Greece's major banks have affirmed their interest in resuming dividends and are well on their way to clearing regulatory hurdles. The banks are already below the non-performing exposure hurdle and, supported by the economic recovery, should quite easily clear the organic capital generation and capital ratio targets. Thus, I feel comfortable underwriting a reinstated sector-wide dividend in 2024; in the likely scenario that they deliver on the targeted 10% to 30% dividend payout range, expect a significant re-rating for the major banks and, by extension, GREK's bank-heavy portfolio.
Still Cheap with Multiple Catalysts in the Pipeline
GREK has outperformed virtually every other European fund in recent months, as tourism-driven economic strength and increased political clarity following ND's resounding win boosted earnings outlooks across the board. And at a P/Book valuation of less than 1x (vs. a low-teens ROE on an upward path), GREK still isn't pricey. From here, investors can look forward to a potential sovereign rating upgrade catalyst later this year, as well as firm commitments to higher dividend payouts by the major banks (note financials is over 30% of the GREK portfolio). Supported by a steadily improving earnings outlook alongside the recovering economy, both events support the case for a further re-rating of the GREK fund in the coming months.
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GREK: Still Cheap With Multiple Catalysts In The Pipeline